Joan,
"Why not? If you can have great cash flow with lousy free cash flow (my favorite example being the oil drillers), why can't a company with good cash flow (here I'm not saying lousy) have much better free cash flow, relative to the price you are paying to buy its stock? For example: if a company has no capital expenditures at all, and all the other companies do, its price/FCF ratio is likely to be lower than its price/CF ratio. I have a long list of companies whose price/FCF ratios are lower than their price/CF ratios. Of course, it was garnered from sources that you consider suspect."
I think what Pirah is saying is that since FCF = cash flow - cap. exp., FCF can never be larger than CF. Therefore, it's impossible to have a P/FCF which is lower than the P/CF.
In your example of no cap. exp., it's entirely possible that the P/CF of the company may look the same as everyone elses, but have a much more impressive P/FCF than everyone else. However, this doesn't change the fact that it's mathematically impossible for the P/FCF to be lower than the P/CF. If it appears that way, your source is either using a different definition of FCF than you are, or has garbled the numbers.
Company A
Price: 10
CF: 5
FCF: 1
P/CF: 2
P/FCF: 10
Company B
Price:10
CF:5
FCF:4
P/CF: 2
P/FCF: 2.5
Much more tempting P/FCF, but still higher than it's own P/CF.
Andrew |
