If we are examining P/CF (for whatever reason), the denominator, CF, must be FCFE (free cash flow to equity), right? Cannot be FCFF (free cash flow to firm).
Apple/Apple
Orange/Apple
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I mean you could do it either way, but essentially you are right. I'm pretty sure FCFF doesn't include payments to debt holders so FCFE would make more sense if you are comparing stock price to cash flow
It just depends what you mean by P. If P means the equity value (market cap, per share value, etc) then yes, you'd probably only want the denominator to be free cash to the equityholders. If you use free cash to the entire firm, then you'd want something more indicative of the entire business as your numerator, as in enterprise value.
It's basically the same idea as when it's okay to use P/E as opposed to EV/EBITDA or some similar metric. If the company is mainly equity then P/E is a fair multiple to use in assessing value, but the more cash-centric number that's probably better with a levered company or one with dogshit earnings is EV/EBITDA, though I personally hate EBITDA with a passion since it can be fucked with so easily.
Yes, this is exactly my thinking. Lol, if it is a tech company earning nothing, or losing money... EV/Sales. even worse, lol.
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Building on this question, what's the difference between "Free Cash Flow" and "Free Cash Flow to Firm"? Sounds the same to me.
Free Cash Flow: http://www.investopedia.com/terms/f/freecashflow.asp#axzz29nHeyGuI Free cash Flow to Firm: http://www.investopedia.com/terms/f/freecashflowfirm.asp#axzz29nHeyGuI
^they don't explain the differences between the two
FCFF: Cash flow that DEBT and EQUITY holders have a "claim" on. Equity holders have exposure to it from dividends or buybacks, debt holders can get their claim via a principal repayment, or coupon payments.
in terms of valuation: we would discount using the WACC and come to enterprise value.
FCFE: This one nets out the debt holders' interest, so, it takes away interest payments, coupon repayments and other sinking fund type repayments, too.
Valuation: We would discount using the COST OF EQUITY and come to equity value.
If that is still confusing, I can post a video that is helpful.
lol I should have made my question more clear.
I already understand everything you just listed. But Investopedia has separate definitions for Free Cash Flow, Free Cash Flow to Firm, Free Cash Flow to Equity, Unlevered Cash Flow and Levered Cash Flow. The equations given for them are all slightly different and that's what's confusing me. (e.g. levered cash flow and FCFE should be the same, no? but Investopedia says otherwise)
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