Investment Valuation Ratios: Price/Cash Flow Ratio
  1. Investment Valuation Ratios: Introduction
  2. Investment Valuation Ratios: Per Share Data
  3. Investment Valuation Ratios: Price/Book Value Ratio
  4. Investment Valuation Ratios: Price/Cash Flow Ratio
  5. Investment Valuation Ratios: Price/Earnings Ratio
  6. Investment Valuation Ratios: Price/Earnings To Growth Ratio
  7. Investment Valuation Ratios: Price/Sales Ratio
  8. Investment Valuation Ratios: Dividend Yield
  9. Investment Valuation Ratios: Enterprise Value Multiple

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 the stock's market price to the amount of cash flow the company generates on a per-share basis.

This ratio is similar to the price/earnings ratio, except that the price/cash flow ratio (P/CF) is seen by some as a more reliable basis than earnings per share to evaluate the acceptability, or lack thereof, of a stock's current pricing. The argument for using cash flow over earnings is that the former is not easily manipulated, while the same cannot be said for earnings, which, unlike cash flow, are affected by depreciation and other non-cash factors.

Formula:


Components:


The dollar amount in the numerator is the closing stock price for Zimmer Holdings as of December 30, 2005 as reported in the financial press or over the Internet in online quotes. In the denominator, the cash flow per share is calculated by dividing the reported net cash provided by operating activities (cash flow statement) by the weighted average number of common shares outstanding (income statement) to obtain the $3.55 cash flow per share figure. By simply dividing, the equation gives us the price/cash flow ratio that indicates as of Zimmer Holdings' 2005 fiscal yearend, its stock (at $67.44) was trading at 19.0-times the company's cash flow of $3.55 per share.

Variations:
Sometimes free cash flow is used instead of operating cash flow to calculate the cash flow per share figure.

Commentary:
Just as many financial professionals prefer to focus on a company's cash flow as opposed to its earnings as a profitability indicator, it's only logical that analysts in this camp presume that the price/cash flow ratio is a better investment valuation indicator than the P/E ratio.

Investors need to remind themselves that there are a number of non-cash charges in the income statement that lower reported earnings. Recognizing the primacy of cash flow over earnings leads some analysts to prefer using the P/CF ratio rather than, or in addition to, the company's P/E ratio.

Despite these considerations, there's no question that the P/E measurement is the most widely used and recognized valuation ratio.

Investment Valuation Ratios: Price/Earnings Ratio

  1. Investment Valuation Ratios: Introduction
  2. Investment Valuation Ratios: Per Share Data
  3. Investment Valuation Ratios: Price/Book Value Ratio
  4. Investment Valuation Ratios: Price/Cash Flow Ratio
  5. Investment Valuation Ratios: Price/Earnings Ratio
  6. Investment Valuation Ratios: Price/Earnings To Growth Ratio
  7. Investment Valuation Ratios: Price/Sales Ratio
  8. Investment Valuation Ratios: Dividend Yield
  9. Investment Valuation Ratios: Enterprise Value Multiple
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. Cash Flow Per Share

    A measure of a firm's financial strength, calculated as: Cash ...
  5. Free Cash Flow To Sales

    A ratio that illustrates the percentage of free cash flow to ...
  6. Price-To-Cash-Flow Ratio

    The ratio of a stock’s price to its cash flow per share. The ...
RELATED FAQS
  1. What are some ratios I can use the operating cash flow ratio with?

    Understand the importance of a company's operating cash flow. Learn about some of the financial ratios that use the operating ... Read Answer >>
  2. 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 >>
  3. What is the difference between cash flow and fund flow?

    See how cash flow and fund flow differ from each other, and why fund flow can be used very differently by accountants and ... Read Answer >>
  4. 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 >>
  5. 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 >>
  6. Are taxes calculated in operating cash flow?

    Learn how taxes are involved with the calculations for operating cash flow, and find out about the importance of operational ... Read Answer >>

You May Also Like

Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center