You don’t buy “cheap” stocks by looking at P/E.
The smarter filter is how much cash the whole business throws off. That’s EV to FCF.
What is EV to FCF, simply?
Think of buying a vending machine. You don’t just look at the sticker price. You add the IOU you took out and subtract cash already in the drawer. Then you ask: how much cash does it spit out after restocking?
EV/FCF is that price-to-cash check.
Key parts:
• Enterprise Value (EV) = what the whole company costs. Market cap + debt − cash.
• Free Cash Flow (FCF) = cash left after running and investing in the business. Operating cash flow − capital expenditures.
Formulas:
• EV to FCF:
EV/FCF = Enterprise Value / Free Cash Flow
• FCF Yield (the flip side):
FCF Yield = Free Cash Flow / Enterprise Value}} = 1 / (EV/FCF)
How to use it:
1. Lower EV/FCF = cheaper cash, all else equal. Higher = paying up for growth or quality.
2. Compare inside the same industry. Different business models have different cash needs.
3. Look over several years. FCF can swing with capex and cycles.
4. Watch for one-offs: acquisitions, big capex spikes, or stock-based comp that distort “real” cash.
5. Pair it with growth and returns on capital. Cheap and shrinking isn’t a deal.
