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What could be better than free money, right? Low Price to Free Cash Flow (P/FCF) is considered a useful alternative to Low Price to Earnings (P/E) for evaluating possible value in stock purchase candidates. Earnings can be more easily manipulated by management to make the P/E look good. The stock of a successful, growing company often can be evaluated by several value criteria, such as the growth of its dividends, earnings, sales, and free cash flow. Ideally, all will similarly reflect progress in adding value for shareholders. Yet if there is a discrepancy, the P/FCF is usually more reliable than other measures. Free cash flow is defined as that extra stream of dollars generated by a company's profitable activities after subtracting normal capital expenses and shareholder dividends. Price to Free Cash Flow, then, is the price per share divided by the per share free cash flow. The lower this ratio, the more easily beneficial changes can be made by management, hence increasing the stock's value. These might include increasing the dividend, further reducing company debt, repurchasing stock when it is selling below intrinsic value, buying up smaller businesses whose operations can help add to the company's bottom line, upgrading plant and equipment, etc. Companies that generate more free cash flow for their market price are also attractive to potential buyers of the entire corporation. Such subsequent mergers and acquisitions often lead to nicely profitable prices per share being paid to shareholders . All things being equal, then, it is better to have holdings in a company with low P/FCF.
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