PepsiCo Hasn't Been This Cheap Relative to Free Cash Flow in 10 Years. Here's Why That's the Signal to Buy.

There are several ways of measuring a stock's value, each of which has its own pros and cons. Perhaps the best-known way is a ticker's price-to-earnings (or P/E) ratio , which simply compares that stock's price to its underlying per-share profit. A company's top goal is generating earnings, after all.

A reported per-share bottom line, however, isn't necessarily the only meaningful means of weighing what a stock's worth. Although it's not a commonly considered valuation metric, in certain cases, cash flow can mean even more than a reported earnings figure.

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To this end, on a free-cash-flow basis, shares of beverage company PepsiCo (NASDAQ: PEP) haven't been this cheap in a decade. You might want to dive in before other investors begin figuring it out.

There's certainly some similarity between profits and cash flow. But there are important differences as well.

Net profits are, of course, the difference between any given quarter's reported revenue and that same quarter's ongoing operating costs and ordinary expenses. Sometimes you'll also hear a non-GAAP (generally accepted accounting principles) profit figure that excludes unusual one-time expenses, which paints a more accurate picture of how that company is performing.

Cash flow, on the other hand, is a measure of the dollars left over from actual collected revenue during a particular quarter after all of that quarter's bills are paid with real money. Notably, cash flow reflects any loans taken out or repaid during that accounting period, interest payments, depreciation, the amortized purchase of equipment, gains or losses on the sale of any assets, or any other actual cash-consuming cost. Free cash flow is the amount of real cash left behind after covering these costs, but without capital expenditures factored in, which -- like non-GAAP profits -- can sometimes paint a clearer picture of that particular company's current fiscal health.

Both are important metrics in their own right, too, even if they seemingly paint the same picture in a slightly different way. The chief difference between the two is just timing. The cost of manufacturing goods, providing services, or buying inventory isn't recognized on a profit-and-loss statement until that good or service is turned into billable revenue. The total net cost of procuring those goods or creating those services and everything even indirectly related to them, however, is reflected on a cash flow statement as they're paid for or sold.