Price-To-Cash-Flow Ratio

  

Categories: Company Valuation

See: Cash Flow. See: EBITDA.

So you're buying a stock for $28 a share. This year, it has $2 in cash flow, or EBITDA. See: Free Cash Flow so you know the difference. FCF is kind of a more "net number" than is EBITDA...more "pure" when it comes to actual cash.

Why does it even matter? Well, if you're paying $28 for $2 in cash returns this year, you're paying 14 times that number, or a cash on cash return of something like 1/14, or about 7%. Good? Bad? Ugly? Unclear. If the $2 is going to $3 next year and $4 the next, then great; if it's going negative, then yeah, not so good. It's just another metric investors use to figure out whether they're buying a stock on Macy's White Flower Day Sale...or they're at a Persian Rug Bazaar with a bunch of "friends" selling them...stuff.

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Finance: What is free cash flow?13 Views

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Finance allah shmoop what is free cash flow Well it's

00:06

the cash a company produces and pretty much after everything

00:10

like whatever dot com has one hundred million bucks in

00:12

pre tax profits A tax bill of thirty milton at

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them seventy million dollars in earnings But they also had

00:18

depreciation on their whatever stamping factory of ten million dollars

00:22

So in fact they generated eighty million dollars in cash

00:25

while having seventy million in earnings And no there were

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no tricky things done in the year to draw down

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inventory volumes to produce a lot more cash or any

00:33

other chick a nunnery here The company also has committed

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to paying a dividend of five milic order or twenty

00:38

mil a year That dividend payment gets included in the

00:41

free cash flow calculation as well So after eighty million

00:44

in cash production from operations the dividend the company pays

00:48

out to shareholders then is taken out of that eighty

00:51

So the free cash number Yep sixty million bucks And

00:54

why does this number even matter Well if you go

00:56

old school on investing and think about what a share

00:59

of a given company buys you in the form of

01:01

earnings and cash or dead on the balance sheet this

01:04

year Next year in the next you can think of

01:07

whatever dot com in terms of having a free cash

01:10

flow yield That is if the company was valued at

01:13

a billion dollars and it had one hundred million dollars

01:15

of cash and one hundred million dollars of dead zero

01:18

net cash or debt And yes this is oh so

01:21

theoretical Well then the company would have a six percent

01:24

free cash flow yield right because it's generating sixty million

01:27

after everything over a bill so that sixty mill is

01:30

the free cash flow But investors get the free cash

01:33

flow in some form most likely justin accumulation of cash

01:36

on the balance sheet and then they also get another

01:39

twenty mill in dividends So add to that twenty million

01:42

dividends and assuming you get no growth or decline while

01:45

investors or buying in it a billion dollar valuation while

01:48

they be getting a total of eight percent of their

01:50

cash back in one form or another each year either

01:53

in just cash produced by the company free castle and

01:55

or that dividend or set another way the sixty million

01:58

free cash flow would presumably then just accumulate on the

02:01

balance sheet Adding value to the company is cash piled

02:03

up or would be used wisely in one form or

02:06

another presumably like to buy back stock or by competitors

02:09

or whatever other whatever's The key idea here is that

02:12

free cash flow is truly free It's not encumbered It

02:16

is an ode for dividends or other big sinking fund

02:19

obligations This year or other things it's free and available

02:23

for the company to do You know whatever they want 00:02:26.105 --> [endTime] with

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