Definition:

3-year Free Cash Flow per Share Growth Rate measures the annualized rate of growth in a company's free cash flow per share over a three-year period. It provides insight into how effectively a company is generating cash relative to its share count over time.

Formula:

((FCF per Share in Year 3 / FCF per Share in Year 0)^(1/3)) - 1

How to use the metric:

Investors use this metric to evaluate a company's ability to increase its free cash flow on a per-share basis, which can indicate financial health and potential for shareholder returns. A higher growth rate suggests a company is improving its cash generation efficiency, potentially leading to increased dividends or reinvestment opportunities.

Limitations:

This metric may not account for short-term fluctuations or anomalies in cash flow, such as one-time expenses or revenue spikes. It also assumes consistent share count, which may not be the case due to stock buybacks or issuance. Additionally, it does not consider industry-specific factors that might affect cash flow.

Applies to:

This metric works best in industries with stable cash flow patterns, such as utilities, consumer staples, and mature technology companies, where cash flow generation is a key performance indicator.

Doesn't apply to:

It may not be as applicable to industries with volatile cash flows, such as startups, biotech, or cyclical industries like mining, where cash flow can be highly unpredictable due to external factors like regulatory changes or commodity price swings.

Summary:

The 3-year Free Cash Flow per Share Growth Rate is a useful metric for assessing a company's cash generation efficiency relative to its share count over time. While it provides valuable insights into financial health and potential for shareholder returns, it should be used in conjunction with other metrics and industry considerations to form a comprehensive view of a company's performance.