What they measure
P/E = price / earnings per share (a multiple). FCF yield = free cash flow / market cap (a yield). Invert P/E to get earnings yield for a like-for-like comparison.
Comparison
FCF yield vs P/E ratio
FCF yield and the P/E ratio both measure how cheap a stock is, but from different angles. P/E compares price to accounting earnings; FCF yield compares free cash flow to price (roughly the inverse of price-to-FCF). FCF yield is harder to manipulate because cash is harder to fake than earnings. A 7% FCF yield is roughly equivalent to a 14x price-to-FCF multiple.
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Short answer
Use P/E for a quick, universally-quoted snapshot; use FCF yield when you want the cash truth. Earnings can be massaged; free cash flow is much harder to game. When the two disagree, trust the cash.
The key differences
Manipulation resistance
Earnings bend to accounting choices, depreciation, accruals, one-offs. Free cash flow is closer to the actual cash that hit the bank.
Capex sensitivity
P/E ignores capital intensity; FCF yield captures it because capex is subtracted. Decisive for capex-heavy industries.
How to compare them
A 7% FCF yield is roughly a 14x price-to-FCF. A P/E of 14 is a ~7.1% earnings yield. Same shape, different inputs.
When the gap is a warning
A company reports strong, growing earnings and trades at a reasonable 15x P/E: it looks cheap. But its free cash flow is thin because it's capitalizing costs and spending heavily on capex, so its FCF yield is only 2 percent (a ~50x price-to-FCF).
That gap is the signal. The earnings say 'cheap'; the cash says 'expensive'. More often than not, the cash is telling the truth, which is why value investors lead with FCF yield and use P/E as a quick secondary read.
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Related
- What is FCF yield? - the cash-based valuation gauge, defined.
- What is the P/E ratio? - the earnings-based multiple, defined.
- What is earnings yield? - the inverse of P/E: the bridge between the two.
- What is free cash flow? - the number FCF yield is built on.
See both, side by side
invest-like shows FCF yield and P/E together on every stock, so you can spot the gap that reveals whether 'cheap' is real.
Educational only. invest-like is not a registered investment adviser; nothing here is personalised investment advice. Always do your own research and consider your individual circumstances.