What is Price to Free Cash Flow ratio?

Price to Free Cash Flow ratio is a stock valuation method that compares a company's market price to its free cash flow for a given period. This ratio is similar to the price-to-cash flow. It uses the free cash flow instead of cash flow. Free cash flow reduces operating cash flow by capital expenditures. The lower price to free cash flow ratio the better. This ratio basically tells us how much we spend for each dollar of free cash flow.

For example, if a company generated $100 million in operating cash flow and spent $20 million on capital expenditure, then it generated free cash flow of $80 million. If the company currently has a market capitalization of $2 billion, the company trades at 25 times free cash flow ($2 billion/$80 million).

Capital expenditures are funds used by a company to buy, repair or improve assets such as property, industrial buildings or equipment.