Investing for Beginners , investing

Price to free cash flow (P/FCF) or EV/FCF ratio are ratios that compare company's price to its free cash flow. The main difference between those two ratios is that EV/FCF also includes the effect of company’s financial debt to the nominator but exludes interest expenses from the cash flow and ignores the value created by leverage which may be more accurate if risk is not adjusted additionally.

EV/FCF or P/FCF might be an effective valuation ratio for dividend stocks. Basically P/FCF ratio shows the possible payout of the company compared to its price on the stock exchange. If this ratio is low, that means the investor may expect high dividend yield or stock buybacks from the company. However, company may chose not to pay money out but to accumulate capital for some acquisition which may create or destroy the value for shareholders depending on the conditions.

Another similar valuation ratio is P/CF (or EV/CF) which includes whole operating cash flow instead of only free cash flow. Also 'free cash flow yield' can be used instead of ‘price to free cash flow ratio’ and it is almost the same only is calculated reversely.