One of the key indicators in the context of business valuation is capitalization to free cash flow (P/FCF).
Understanding Free Cash Flow (FCF)
Free cash flow shows how much money remains in the business after the realization of mandatory expenses that cannot be postponed or postponed (operating cash flow minus capital expenditures).
FCF can be reallocated in four ways: shareholder policy (dividends and buybacks), M&A operations, debt repayment or accumulation of financial assets (short-term or long-term).
Current P/FCF Valuation for US Non-Financial Companies
For all US non-financial companies, the current P/FCF valuation is 26.2, the average in 2017 - 2019 was 24.1, 21 in 2012 - 2016 and the same in 2004 - 2007, meaning the market is only 9% overbought by 2017 - 2019 and 30% over the previous decade.
FCF to revenue is now 8.6% for all companies, up markedly from 7.7% in 2017 - 2019 and 7% in 2012 - 2016 and 2004 - 2007. Excluding technology companies FCF to revenue is now 6.8 vs 6.2, 5.7 and 6.2 for the above periods based on proprietary calculations.
Excluding technology companies, P/FCF is now 22.8 vs 24.9, 22.7 and 20.1 for the above periods, i.e. it turns out that the current market valuation is even slightly cheaper than it was previously.
Conclusion
In conclusion, the P/FCF ratio is an important measure of business valuation. The current P/FCF ratio for US non-financial companies is 26.2, which is slightly above historical averages. The FCF to revenue ratio has increased, especially when excluding technology companies, indicating a potentially favorable market valuation of non-technology companies compared to prior periods.