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QuestionsCategory: Valuation QuadrantFree Cashflow vs Operating Cashflow
Jieren Zheng asked 5 years ago

Hi guys,
I was watching the valuation quadrant webinar and suddenly this question struck me.
Why not Price to Free Cashflow instead of Price to Operating Cashflow?
Seems like also a good metric to ensure that companies should generate FCF, especially if the company is stable and producing predictable consistent earnings.

4 Answers
Victor Chng answered 5 years ago

Hi Jieren,
 
You can use price to free cash flow for mature companies. As mentioned before, investment quadrant type of companies are usually growth companies. They tend to have negative cash flow due to their expansion which require high capex. Hence, Price to free cash flow will not be applicable for them.

Jieren Zheng answered 5 years ago

Hi Victor,
Thanks for the reply! :D

I do realise this is the scope of investment quadrant, just wanted some metrics for stable companies too. :D Any suggestions on what amount of Price to FCF range are we looking for?

Victor Chng answered 5 years ago

Hi Jieren,
 
Since mature and stable companies does not spend much on their capex which means that the difference in Cash flow and Free cash flow does not differ that much. The range is still same as Price to Cash flow. I will view fair value at 15x but prefer to get it at 12x. Anything below 10x is a steal.

Jieren Zheng answered 5 years ago

Hi Victor,
Understood! Thanks :)