Price to Free Cash Flow Ratio

How to read it

The ratio divides the stock price by free cash flow per share. stockrow builds free cash flow for the trailing twelve months as operating cash flow plus the net change in property, plant and equipment and the net change in intangible assets — changes that are usually negative, because they record spending — and divides it by the weighted basic share count of the latest quarter. The numerator moves every trading day with the price; the denominator moves when operating cash flow or capital spending changes, or when the share count does. A higher value means investors pay more for each dollar of free cash flow.

What is typical

The level depends on how much a business must reinvest to keep growing. Asset-light companies such as software firms turn most of their operating cash into free cash flow, while manufacturers, utilities and telecoms spend heavily on equipment and networks. Compare a company with the median for the company’s sector.

Pitfalls

stockrow shows the ratio as zero when the result is negative, so a company burning cash reads as zero rather than as cheap. It is worked out for every trading day, from the latest reported figures on or before that day. Quarterly and annual values are the daily value on the first trading day on or after each period end. A year of heavy investment can make a healthy company look expensive.