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.
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