Because free-cash-flow is after capex and after working capital, this multiple captures economics that earnings-based measures miss. It is harder to game than pe-ratio but noisier, since a single heavy investment year distorts it.
Use a three-year average free cash flow in the denominator for capital-intensive businesses, or use maintenance-capex rather than total capex if growth spending is genuinely optional.
Example: Northwind Tools has a $2.5B market cap and $89M of free cash flow, 28 times. Using the three-year average free cash flow of $104M the multiple falls to 24 times.
Related: free-cash-flow, free-cash-flow-yield, maintenance-capex, fcf-margin, trailing-pe