DEFINITION of 'PriceToCashFlow Ratio'
The ratio of a stock’s price to its cash flow per share. The pricetocashflow ratio is an indicator of a stock’s valuation. Although there is no single figure to indicate an optimal pricetocashflow ratio, a ratio in the low single digits may indicate the stock is undervalued, while a higher ratio may suggest potential overvaluation. The ratio takes into consideration a stock’s operating cash flow, which adds noncash earnings such as depreciation and amortization to net income. It is especially useful for valuing stocks that have positive cash flow but are not profitable because of large noncash charges.
Calculated as:
BREAKING DOWN 'PriceToCashFlow Ratio'
For example, consider a company with a share price of $10 and 100 million shares outstanding. The company has net income of $125 million in a given year, and operating cash flow of $200 million. It therefore has cash flow per share of $2 (i.e. $200 million / 100 million shares) and EPS of $1.25 ($125 million / 100 million shares). The company therefore has a pricetocashflow ratio of 5 (i.e. share price of $10 / cash flow per share of $2) and a Price / Earnings ratio of 8 ($10 / $1.25).
An alternate way of calculating pricetocash flow is by taking the ratio of a company’s market capitalization to its operating cash flow. From the above example, it follows that the ratio can also be calculated as = $1,000 million / $200 million = 5.
The optimal level of this ratio depends on the sector in which a company operates, and its stage of maturity. A new and rapidly growing technology company, for instance, may trade at a much higher ratio than a utility that has been in business for decades. This is because although the technology company may only be marginally profitable, investors will be willing to give it a higher valuation because of its growth prospects. The utility, on the other hand, has stable cash flows but few growth prospects, and as a result trades at a lower valuation.
The PricetoFree Cash Flow ratio, which takes into account free cash flow – or cash flow minus capital expenditures – is a more rigorous measure than the pricetocashflow ratio.

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