Using Price-to-Free-Cash-Flow for Assesing Growth Potential

Michael Teague  |

When analyzing the fundamental health of companies and their potential for growth, the usual suspects of valuation metrics such as Price-to-Earnings, the various Earnings-Per-Share growth rates, etc., are all useful. Perhaps once important category that gets overlooked more than it should is a company’s Free-Cash-Flow figures, which can serve as a telling starting point to a much more substantial analysis of how solid a given company’s performance may or may not be going in to the future.

Simply put, a company’s Free-Cash-Flow number represents how much cash is left after the cost of maintenance and/or expansion of operations (otherwise known as Capital Expenditures, or CAPEX) has been paid for. It is often used by investors because it offers a more tangible picture of a company’s financials. While earnings numbers are useful, they can often be a distraction from a company’s financial health. Generally speaking, the larger a company’s FCF, the more money they have to do things like reinvest, pay higher dividends, and so on.

Price-to-Free-Cash-Flow is calculated by dividing a company’s market cap by its FCF figure. P/FCF permits a company’s market price to be understood in the context of its annual FCF. The higher a company’s P/FCF number, the more expensive it is. To get the most out of a P/FCF ratio, one will want to compare the current figure to a company’s past annual P/FCF figures to compare with historic trends.

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As well, one will want to compare PFCF figures of a given company with the average for that specific industry to help provide a basis for ascertaining that a company’s earnings and projections are resting on a solid foundation.

This screen could serve as a nice example of how to put P/FCF to work. The filters used are P/FCF under 10, in the Consumer Goods sector, with analyst recommendations of “buy or better”, and with a market cap of between $300 million to $2 billion.

The results are the following:

-Sappi Limited (SPP), a paper products manufacturer from South Africa, with shares at $3.08 and a P/FCF of 4.15
-Perry Ellis International (PERY), a textile and apparel clothing company, with shares at $19.25, and a P/FCF of 4.90
-Universal Corp (UVV), another tobacco company, with shares at $55.67, and a P/FCF of 5.21
-Alliance One International (AOI), a tobacco company, whose shares are currently trading at $3.80, and has a P/FCF of 5.93
-Standard Motor Products (SMP), an auto parts manufacturer, with shares at $22.40, and a P/FCF of 8.41
-Iconix Brand Group (ICON), a textile and apparel footwear/accessories company, with shares at 24.57, and a P/FCF of 8.51
-Schweitzer-Mauduit International (SWM), another paper products company, with shares at $36.63, and a P/FCF of 9.15.
-G-III Apparel Group (GIII), a textile and apparel clothing company, with shares currently at $36.00, and a P/FCF of 9.37

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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