When using unlevered free cash flow multiples, which value metric should you pair it with?

• A. Enterprise Value
• B. Equity Value
• C. Market Cap
• D. Price/Sales

Answer: (A)

Unlevered free cash flow is the cash the company generates before paying interest and after reinvestment, available to all providers of capital (both debt and equity). Because it reflects the total performance of the entire business, the appropriate valuation multiple is tied to the value of the whole firm. Enterprise value represents the value of the entire business, including debt and minus cash, so pairing unlevered free cash flow with enterprise value (EV/FCF) aligns the cash flow that accrues to all capital providers with the price of the entire firm. Using equity value or market cap would mismatch a cash flow that isn’t reduced by debt obligations, and using a revenue-based or price-based multiple like Price/Sales would not reflect cash profitability at all.