How to use the price-to-free-cash-flow calculator
All company amounts are in millions of dollars.
- Enter the market value as market capitalization, or as share price times shares outstanding. Add the share count in either case to see FCF per share and implied share prices.
- Enter free cash flow. Either type operating cash flow and capital expenditure from the cash flow statement, or enter FCF directly. Capital expenditure appears as a negative number in the statement; enter it as positive.
- Add stock-based compensation (optional), found near the top of the cash flow statement, to see FCF with it treated as a cost.
- Add a bond yield (optional), for example the 10-year Treasury yield, to compare the two.
Use the last 12 months, and check a few years of history: capital spending is lumpy, and one quiet year can flatter free cash flow.
The formulas
P/FCF = Market capitalization ÷ FCF
FCF yield = FCF ÷ Market capitalization = 1 ÷ (P/FCF)
FCF per share = FCF ÷ Shares outstanding
FCF yield after SBC = (FCF − Stock-based compensation) ÷ Market capitalizationAll flows cover the same 12 months. P/FCF is shown only when free cash flow is positive; the yield is shown either way.
A worked example
Company A is worth $20,000M, with 400 million shares. Over the last 12 months it generated $1,800M of operating cash flow and spent $600M on equipment and facilities.
Free cash flow is $1.20B, or $3.00 a share. The P/FCF ratio is 16.67 and the FCF yield is 6.00%, which is 1.50% above the 4.5% bond yield.
Company A also paid $200M in stock-based compensation. Treating that as a cost, the FCF yield falls to 5.00% and P/FCF rises to 20.00.
The table under the calculator turns the question around. If you want a 5% FCF yield, today’s cash flow supports a share price of $60.00; if you want 8%, the price would have to be $37.50.
Comparing the FCF yield with a bond yield
The FCF yield and a bond yield are both cash returns on the price you pay, which makes the comparison natural. They are not the same kind of return, though:
- A bond’s coupon is fixed. Free cash flow can grow, which is why stocks with growing cash flow can be good value at FCF yields below the bond yield.
- Free cash flow can also shrink or turn negative, and it belongs to the company, not to you. You receive only what it pays out as dividends or uses for buybacks.
A positive spread says you start with more cash return than the bond offers. Whether it is enough depends on how confident you are that the cash flow will hold up.
Capital spending changes the picture
P/FCF punishes businesses that must reinvest heavily, which is the point: cash spent on keeping the business running is not available to shareholders. If Company A needed $1,400M of capex instead of $600M, free cash flow would fall to $400.00M and P/FCF would jump to 50.00, with no change in earnings.
The distinction that matters is why the spending happens. Maintenance capex keeps the business where it is; growth capex builds new capacity and should raise future cash flow. A company in a heavy expansion phase can show weak FCF that later improves. Company reports rarely split the two, so look at capex relative to depreciation over several years.
When free cash flow is negative, as with $500M of operating cash flow against $900M of capex, P/FCF is not meaningful and the yield turns negative: -2.00%.
What this calculator does not include
- Debt. P/FCF uses the value of the shares only. For indebted companies, compare enterprise value with unlevered free cash flow, or use our EV/EBITDA calculator.
- Working capital swings. A one-off change in inventory or receivables can inflate or depress operating cash flow for a year.
- Acquisitions. Cash spent buying other companies is usually not counted in capex, even when it is how the company grows.
- Future growth. A ratio uses one year. A DCF model values the whole stream of future cash flows.