Investment Valuation Ratios: Price/Cash Flow Ratio
AAA
  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

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
Investment Valuation Ratios: Price/Cash Flow Ratio
RELATED TERMS
  1. Deferred Tax Asset

    A deferred tax asset is an asset on a company's balance sheet ...
  2. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  3. Return On Investment - ROI

    A performance measure used to evaluate the efficiency of an investment ...
  4. Working Capital

    This ratio indicates whether a company has enough short term ...
  5. Bid Wanted

    An announcement by an investor who holds a security that he or ...
  6. Net Present Value - NPV

    The difference between the present value of cash inflows and ...
  1. Does gross profit include depreciation or amortization?

    Understand the distinction between depreciation and amortization, and learn under which circumstances either type of expense ...
  2. Does gross profit include labor and overhead costs?

    Find out how companies treat different kinds of labor costs when calculating gross profit and whether overhead costs impact ...
  3. Does gross profit account for sales returns?

    Discover how accountants record the return of a saleable item and how that might impact the gross profit for a firm, either ...
  4. What are the differences between amortization and impairment?

    Learn the differences between amortization and impairment as they relate to intangible assets held on a company's balance ...
comments powered by Disqus
Related Tutorials
  1. Industry Handbook
    Investing Basics

    Industry Handbook

  2. Investing For Safety and Income Tutorial
    Bonds & Fixed Income

    Investing For Safety and Income Tutorial

  3. Discounted Cash Flow Analysis
    Fundamental Analysis

    Discounted Cash Flow Analysis

  4. Ratio Analysis Tutorial
    Fundamental Analysis

    Ratio Analysis Tutorial

  5. American Depositary Receipt Basics
    Economics

    American Depositary Receipt Basics

Trading Center