The previous post used earnings to ask how long it would take a company to pay back what it owes. Debt to free cash flow asks the same question with a different — and often more honest — number on the bottom.
Earnings is an accounting figure. It includes things like depreciation and amortization, which lower reported profit without anything actually leaving the bank account. It can also include revenue from contracts that have been signed but not yet paid. Useful, but a step removed from cash.
Free cash flow lives on a separate statement, the cash flow statement, which tracks money actually moving in and out. It’s typically split into three blocks: operations, investing, and financing. The most common definition of free cash flow is operating cash flow minus capex — the money the business generates from running, minus what it has to spend to keep running. On Sponda I use a slightly broader version: operating cash flow minus the entire investing block. That sweeps in things like acquisitions, which aren’t strictly capex, but for the purpose of judging a company I find it more useful than not. If you’d rather see the stricter version too, tell me — adding another metric is easy.
The threshold is the same as debt to earnings: under 3 is the range I try to stay in. Above that, the cash the business actually generates would take more than three years to clear the debt — long enough that anything going wrong in the meantime starts to matter.
The number isn’t always self-explanatory. Berkshire Hathaway, on a 10-year average, sits around 26 times — wildly outside that range. The reason is the broader definition: Berkshire is a holding company, and treating every acquisition as if it were maintenance capex makes the denominator look much smaller than it really is for ongoing operations. Stricter capex would change the picture. The lesson isn’t to ignore the metric, it’s that any single ratio benefits from knowing what kind of company you’re looking at.
Telling earnings and cash flow apart, and noticing where one better translates a specific business, is a lifelong pursuit. If you’re starting out, the safer move is to stick to the obvious cases and skip the ones where the number is hard to interpret. You’ll pass on a few good companies and avoid a lot of bad ones.
On Sponda you’ll find debt to free cash flow under Leverage, with a short explanation, alerts (e.g. notify me if it drops at or below 3), and the history of the ratio over time so you can see whether it’s improving or deteriorating.
That’s debt to free cash flow. More on the next one.