Price-To-Cash-Flow Ratio


DEFINITION of 'Price-To-Cash-Flow Ratio'

The ratio of a stock’s price to its cash flow per share. The price-to-cash-flow ratio is an indicator of a stock’s valuation. Although there is no single figure to indicate an optimal price-to-cash-flow 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 non-cash 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 non-cash charges

Calculated as:

Price-To-Cash-Flow Ratio

BREAKING DOWN 'Price-To-Cash-Flow 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 price-to-cash-flow 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 price-to-cash 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 Price-to-Free Cash Flow ratio, which takes into account free cash flow – or cash flow minus capital expenditures – is a more rigorous measure than the price-to-cash-flow ratio.


  1. Cash Flow

    The net amount of cash and cash-equivalents moving into and out ...
  2. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  3. Payout Ratio

    Payout ratio is the proportion of earnings paid out as dividends ...
  4. Registration Right

    A right which entitles an investor who owns restricted stock ...
  5. Retention Ratio

    The proportion of earnings kept back in the business as retained ...
  6. Cross-Sectional Analysis

    A type of analysis an investor, analyst or portfolio manager ...
Related Articles
  1. Markets

    Operating Cash Flow: Better Than Net Income?

    Differences between accrual accounting and cash flows show why net income is easier to manipulate.
  2. Mutual Funds & ETFs

    ETF Analysis: Utilities Select Sector SPDR

    Learn about the Utilities Select Sector SPDR ETF and the benchmark index it tracks, and understand what type of investors may be interested in the fund.
  3. Technical Indicators

    Key Financial Ratios to Analyze Oil Companies

    Learn about key financial ratios investors will want to use when analyzing oil companies, and what these ratios say about the future prospects for companies.
  4. Fundamental Analysis

    Financial Analysis: Solvency Vs. Liquidity Ratios

    Solvency and liquidity are equally important for a company's financial health. A number of financial ratios are used to measure a company’s liquidity and solvency, and an investor should use ...
  5. Investing Basics

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
  6. Fundamental Analysis

    Can Investors Trust The P/E Ratio?

    The P/E ratio is one of the most popular stock market ratios, but it has some serious flaws that investors should know about.
  7. Fundamental Analysis

    Cash Flow Statement: Reviewing The Cash Flow From Operations

    A company's ability to consistently generate positive cash flows from its daily business operations is highly valued by investors. Operating cash flow can uncover a company's true profitability ...
  8. Fundamental Analysis

    An Introduction To Coverage Ratios

    Interest coverage ratios help determine a company's ability to pay down its debt.
  9. Retirement

    Pay Attention To Your Fund’s Expense Ratio

    Despite trends indicating an overall decrease in fees across many fund categories, investors should still pay attention to expense ratios: even small differences in fees can have a significant ...
  10. Investing Basics

    Introduction To Investment Diversification

    Reducing risk and increasing returns in your portfolio is all about finding the right balance.
  1. What average annual return does the oil and gas sector generate for an investor?

    The average annual return for investors generated between 2000 and 2013 by stocks in the oil and gas sector was approximately ... Read Full Answer >>
  2. What is the difference between book-to-market ratio and cash flow to price?

    The book-to-market ratio compares the market capitalization to the book value of a company. This metric indicates whether ... Read Full Answer >>
  3. Can working capital be depreciated?

    Working capital as current assets cannot be depreciated the way long-term, fixed assets are. In accounting, depreciation ... Read Full Answer >>
  4. Do working capital funds expire?

    While working capital funds do not expire, the working capital figure does change over time. This is because it is calculated ... Read Full Answer >>
  5. Do you discount working capital in net present value (NPV)?

    Net present value (NPV) calculations should include the discounted value of changes in working capital. This treatment of ... Read Full Answer >>
  6. How is working capital different from fixed capital?

    There are several key differences between working capital and fixed capital. Most importantly, these two forms of capital ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  2. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  3. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  4. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  5. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
  6. Indemnity

    Indemnity is compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability ...
Trading Center