Price-To-Cash-Flow Ratio

Loading the player...

What is the 'Price-To-Cash-Flow Ratio'

The price-to-cash-flow ratio is 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.

 

RELATED TERMS
  1. Sales To Cash Flow Ratio

    A comparison of a company's sales to its cash flow. The sales ...
  2. Free Cash Flow Yield

    An overall return evaluation ratio of a stock, which standardizes ...
  3. Operating Cash Flow Ratio

    A measure of how well current liabilities are covered by the ...
  4. Price to Free Cash Flow

    A valuation metric that compares a company's market price to ...
  5. Cash Return On Assets Ratio

    A ratio used to compare a businesses performance among other ...
  6. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ...
Related Articles
  1. Investing

    What Is the Price-To-Cash-Flow Ratio?

    A company’s price-to-cash-flow ratio measures its stock price compared to its cash flow per share.
  2. Investing

    Financial Ratios to Spot Companies Headed for Bankruptcy

    Obtain information about specific financial ratios investors should monitor to get early warnings about companies potentially headed for bankruptcy.
  3. Investing

    Analyzing The Price-To-Cash-Flow Ratio

    Find out how this ratio can help you evaluate companies and make investment decisions.
  4. Investing

    Cash Flow Indicator Ratios

    Learn about the operating cash flow to sales ratio, free cash flow to operating cash flow ratio and free cash flow coverage ratio.
  5. Trading

    Free Cash Flow Yield: The Best Fundamental Indicator

    Cash in the bank is what every company strives to achieve. Find out how to determine how much a company is generating and keeping.
  6. Investing

    Evaluating A Statement Of Cash Flows

    The metrics for the Statement of Cash Flows is best viewed over time.
  7. Investing

    Analyze Cash Flow The Easy Way

    Find out how to analyze the way a company spends its money to determine whether there will be any money left for investors.
  8. Investing

    Debt Ratios: Cash Flow To Debt Ratio

    By Richard Loth (Contact | Biography)This coverage ratio compares a company's operating cash flow to its total debt, which, for purposes of this ratio, is defined as the sum of short-term borrowings, ...
  9. Trading

    Free Cash Flow Yield: A Fundamental Indicator

    Free cash flow can measure a business’s performance as if you’re looking at its net income line.
  10. Investing

    Investment Valuation Ratios: Price/Cash Flow Ratio

    By Richard Loth (Contact | Biography)The price/cash flow ratio is used by investors to evaluate the investment attractiveness, from a value standpoint, of a company's stock. This metric compares ...
RELATED FAQS
  1. What is the difference between the operating the operating cash flow ratio and operating ...

    Find out more about the operating cash flow ratio, the operating cash flow margin, how to calculate these ratios and the ... Read Answer >>
  2. What does the operating cash flow ratio measure?

    Learn about the operating cash flow ratio, how the ratio is calculated and what it indicates about a company. Read Answer >>
  3. What is the difference between book-to-market ratio and cash flow to price?

    Learn about the differences between the book-to-market ratio and cash-flow-to-price ratio, as well as in which contexts investors ... Read Answer >>
  4. What is the difference the operating cash flow ratio and solvency ratio?

    Learn about the operating cash flow ratio and the solvency ratio, what they measure, and the difference between the operating ... Read Answer >>
  5. What's the difference between free cash flow and operating cash flow?

    Learn the difference between free cash flow and operating cash flow. Explore how analysts use earnings and cash flow when ... Read Answer >>
  6. Why do analysts look at operating cash flow?

    Learn how operating cash flow is used to determine financial health. Examine how cash flow is calculated, and what a low ... Read Answer >>
Hot Definitions
  1. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  2. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  3. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  4. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  5. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
  6. Weighted Average Life - WAL

    The average number of years for which each dollar of unpaid principal on a loan or mortgage remains outstanding. Once calculated, ...
Trading Center