How to Use P/FCF in a Simple Valuation Checklist

This is the one-page P/FCF checklist. It assumes you can calculate P/FCF in CAD, know when P/FCF misleads and have a peer comparison. Whether the cash flow itself is durable is covered by the FCF quick checklist for stock decisions; this page uses that answer to set a price range. The format mirrors how to use P/E in a simple valuation checklist. It is educational; figures are hypothetical.

Direct answer

Use P/FCF where free cash flow is positive, reasonably stable and measured after all capex, leases, interest and minority claims. Normalize it, score its quality, then set a fair multiple from your required return (r) and a long-run growth rate (g): fair P/FCF ≈ (1 + g) ÷ (r − g). Multiply by normalized FCF per share to get a range, and compare it with today’s price. Keep g modest; most of the answer comes from it.

The P/FCF checklist

#	Step	Question	Pass if
1	Eligibility	Is FCF positive in most of the last 5 years?	4 of 5 years, not a bank or insurer
2	Definition	After capex, lease principal, interest, NCI and preferreds?	Rebuilt per the calculation post
3	Normalize	3-year average or mid-cycle used?	Within about 25% of the latest TTM, or the gap explained
4	Quality	FCF quality score (below)?	6 or more
5	Required return	What annual return do you require?	Your own assumption, recorded
6	Growth	Long-run FCF per share growth?	Below your required return and near nominal GDP or less
7	Fair multiple	(1 + g) ÷ (r − g) at bear, base and bull g	Calculated
8	Price range	Fair P/FCF × normalized FCF per share	Current price at or below base value
9	Cross-check	Do P/E, EV/EBITDA and the dividend agree?	No contradictions

FCF quality score (simple)

Factor	0	1	2
FCF ÷ net income (3-year)	Under 60%	60–90%	Over 90%
Capex ÷ depreciation (5-year)	Under 0.7x or over 2.0x	0.7–0.9x or 1.5–2.0x	0.9–1.5x
SBC ÷ operating cash flow	Over 15%	5–15%	Under 5%
Net debt ÷ EBITDA	Over 4x	2–4x	Under 2x
Acquisition reliance	Spends more than FCF on deals	Some deals	Little or none

8–10: FCF is a solid anchor. 6–7: usable with care. Below 6: lean on a scenario DCF or EV-based measures.

From required return to a fair multiple (hypothetical)

The formula is the growing-perpetuity shortcut: if FCF per share grows at g forever and you require r, the value today is FCF × (1 + g) ÷ (r − g). With r = 9%:

Long-run growth (g)	Fair P/FCF	Matching FCF yield
0%	11.1x	9.0%
2%	14.6x	6.9%
3%	17.2x	5.8%
4%	20.8x	4.8%

Turning it into a price range (hypothetical)

Normalized FCF per share is $2.00 and you require 9%.

Scenario	g	Fair P/FCF	Fair price (× $2.00)
Bear	0%	11.1x	$22.22
Base	2%	14.6x	$29.14
Bull	3%	17.2x	$34.33

If the stock trades at $36.00 (18x normalized FCF), it is above the bull case: the market is assuming more than 3% perpetual growth, or a lower required return than yours. If it trades at $24.00 (12x), it only needs slightly positive growth to meet your return. The required return is your assumption, not a published rate; the growth rate should be lower than long-run nominal economic growth for most mature companies.

Red flags that override the checklist

Red flag	Why it overrides
FCF relies on a working-capital release	Will reverse
Capex well below depreciation for years	Catch-up spending is coming
Dividend or buyback larger than normalized FCF	Funded with debt; see FCF coverage of dividends
Debt maturities ahead of FCF capacity	Refinancing risk; see debt notes and covenant language

Go deeper

For a fuller version of the same logic, see how to build a simple DCF without fake precision. To record the decision and what would change it, use the thesis → catalyst → kill criteria card.

Related reading

• What P/FCF means for Canadian DIY investors
• How to analyze free cash flow for stock decisions
• Triangulating multiples, DCF and peer checks
• What is owner earnings?

Sources

• IAS 7 Statement of Cash Flows; IFRS 16 Leases.
• Gordon, M. J. (1959), “Dividends, Earnings, and Stock Prices,” Review of Economics and Statistics (growing-perpetuity model).

Media credits

• Hero: “Fathometer Survey Bridge Inspection.jpg” by McLaren Engineering Group, CC BY-SA 4.0, via Wikimedia Commons. Cropped and resized to 1280x720. Real photograph of a survey instrument used in a bridge inspection on the St. Lawrence River, not AI-generated.

By Andrew · stocksummarizer.com