Price to free cash flow ratio

What is Price to free cash flow ratio?

Price to free cash flow is an equity valuation metric used to compare a company’s per-share market price to its per-share amount of free cash flow.

Formula:

Price to free cash flow ratio = Price close * Common shares outstanding / Free cash flow

What does Price to free cash flow ratio mean?

The low value of Price to free cash flow ratio indicates that this company is underestimated in relation to its free cash flow. Conversely, if the Price to free cash flow ratio is high, this means that the price of the company is overvalued relative to its Free cash flow. Thus, investors who use this metric for analysis tend to buy shares of companies which display low values relative to other companies in this industry, and avoid companies with rising or high values of this metric.

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