my first up yardstick is to look at share price divided by operating cash flow per share. I am interested in companies reflecting 7 or less.

FCF yield is the Holy Grail...but it can be distorted if a company is heavily reinvesting in itself.

FCF = cash ops ps less reinvestment ps divided by SP. if this is low, lock to see what they are reinvesting in and how successful they are. ROCE (return on capital employed) will tell you this. If it is less than 10%, that’s average to poor. Greater than that, let them rip.

Like the logic of the free cash flow yield and one that has seen growth stocks adjusted due to rising interest rate environment.

FCF assessment of businesses over the past 6 months has been a more relevant factor in making long term decisions on businesses.

I have been comparing FCF to market cap in determining value and using Berkshire Hathaway BRK.A as a base (rightly or wrongly) .

Interesting BRK.A trade at 24-25x current FCF. BRK.A generate on past year $29b of FCF and trade on PE of BRK.A is 8-9.

Other companies in the US which currently trade at similar multiples are Paypal , Adobe, Zoom , Alphabet. META is trading at 16x 2021 FCF which clearly puts in question on current sales being able to be maintained.

At reasonable FCF growth rates of 8-12% for these companies on todays prices the FCF multiples end up at high teens or low 20x's by end of 2024.

There are mid size companies i am following in US such as UPSTART which trade at 30x FCF to market cap currently but growing strongly. The forward looking multiple expected to drop to under 20x by 2024. For a business which continues to grow at 30% plus and gross margins over 80% like the long term outlook.

I have also come across many companies that have free cashflow but are trading at multiples of 100x ie, SQ, ZS, OKTA, TSLA.

Higher risk in current times hence the volatility.

Looking forward next 3yrs+ looking to accumulate companies growing their FCF at 20%plus thus bringing down ratio which in turn should see SP move higher over time.

Stocks accumulated have been UPSTART , TASKUS, AirBNB, Paypal, Adobe .

In the context of Australia i have found it hard to find companies which sit under 30x FCF compared to market cap.

NWL, HUB , JIN as an example are currently around 95x. All have great prospects as businesses and expected to improve their FCF positions strongly especially in light of the strong balance sheets.

A couple that i have been accumulating in past 1-2months are EML and CGS.

Both were trading at 30x current FCF c/w market capitalisation and when you add the growth expected both these will drop to low 20x

Love the discussion and topic

Good points raised by all the responses - one of the things though that definitely stood out to me over the passage of time was the mantra 'cash is king'. The GFC showed it, and at many other times, a lack of good cashflow could be the undoing of highly leverages companies - and that those that had sufficient cashflows regardless of their net "profit" or "loss" tended to have a more reasonable chance of survival during tough times or black swan events. During times of great growth and expansionary monetary policy and stimulus - much of which we've seen these last few years - everything in the share market looks great, and companies that are more leveraged and those without an inkling of profit sometimes go at some pretty lofty valuations and quite often can continue their glory run in the absence of a healthy cashflow statement. But as they say - when the tide goes out, you'll know who's swimming naked.

I think perusing the free cash flow yield would be a great criteria in a wider checklist of items to be on the lookout for in well run companies.

Yield aside, the cashflow statement is also in accounting and finance speak a real 'source of truth' IMHO. It is much harder to game a cashflow statements in/out, than it is net accounting profit/loss. The cashflow statement can be a good source of truth when divergent from what the rest of the financial statements are saying, and true wizards can sometimes unwind movements on the balance sheet and income statement and gain further insight if they have a good grasp of the cashflow statement and general accounting. I've always kept one eye open on the cash flow statement when the hype and euphoria tend to kick in, and have found it helps keep a decent grounding and filter of companies that are less likely to be quality. I'd be rich for the number of companies where outstanding sales and 'growth' metrics, plus flashy graphs, were not translating into solid cash IN through the door.