EV/FCF Ratio
The EV/FCF ratio divides enterprise value by annual free cash flow. A ratio of 8.0 means investors are paying 8 years’ worth of free cash flow for the company. It is the most shareholder-centric valuation multiple because it measures cash available to all investors.
The intuition behind the ratio
Free cash flow — cash available after capital spending — is what actually reaches shareholders and lenders. EV/FCF answers: how many years of that cash must be accumulated to recover the purchase price?
A company with 10x EV/FCF yields 10% free cash flow. One with 20x yields 5%. This is more useful than EV/EBITDA because it accounts for capital intensity and working capital needs.
How to calculate it
Enterprise value ÷ free cash flow (operating cash flow − capital expenditures).
When it works well
Most realistic valuation. FCF is what shareholders get. EV/FCF is the truest cash-based multiple.
Comparing capital intensity. EV/EBITDA can hide capital intensity; EV/FCF reveals it.
Sensitive to sustainability. If free cash flow is inflated (deferred maintenance, shrinking reinvestment), EV/FCF exposes it.
When it breaks down
FCF is volatile. Large capex projects create lumpy free cash flow.
It ignores growth. A mature company with high EV/FCF might be cheap if it does not need reinvestment.
Using EV/FCF in practice
Use EV/FCF as the final valuation check:
- Calculate EV/FCF.
- Compare to peers and historical levels.
- Assess whether FCF is sustainable or inflated by deferred maintenance.
- Cross-check against other multiples.
A company with EV/EBITDA of 10x but EV/FCF of 15x has high capex intensity — investigate why.
See also
Closely related
- EV/EBITDA · EV/EBIT · EV/Sales
- Free cash flow — the denominator
- Price-to-free-cash-flow-ratio — equity version