Price-to-Cash Flow (P/CF) Ratio? Definition, Formula, and Example

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Adam Hayes
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Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

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Updated March 21, 2022
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Thomas Brock
Thomas Brock
Reviewed by Thomas Brock
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Thomas J. Brock is a CFA and CPA with more than 20 years of experience in various areas including investing, insurance portfolio management, finance and accounting, personal investment and financial planning advice, and development of educational materials about life insurance and annuities.
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Price-to-Cash Flow (P/CF) Ratio

Investopedia / Jiaqi Zhou

What Is the Price-to-Cash Flow (P/CF) Ratio?

The price-to-cash flow (P/CF) ratio is a stock valuation indicator or multiple that measures the value of a stock’s price relative to its operating cash flow per share. The ratio uses operating cash flow (OCF), which adds back non-cash expenses such as depreciation and amortization to net income.

P/CF is especially useful for valuing stocks that have positive cash flow but are not profitable because of large non-cash charges.

Key Takeaways

  • The price-to-cash flow (P/CF) ratio is a multiple that compares a company's market value to its operating cash flow or its stock price per share to operating cash flow per share.
  • The P/CF multiple works well for companies that have large non-cash expenses such as depreciation.
  • A low P/CF multiple may imply that a stock is undervalued in the market.
  • Some analysts prefer P/CF over price-to-earnings (P/E) since earnings can be more easily manipulated than cash flows.
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What Is the Price-To-Cash-Flow Ratio?

The Formula for the Price-to-Cash Flow (P/CF) Ratio Is

 Price to Cash Flow Ratio = Share Price Operating Cash Flow per Share \text{Price to Cash Flow Ratio}=\frac{\text{Share Price}}{\text{Operating Cash Flow per Share}} Price to Cash Flow Ratio=Operating Cash Flow per ShareShare Price​

How to Calculate the Price-to-Cash Flow (P/CF) Ratio

In order to avoid volatility in the multiple, a 30- or 60-day average price can be utilized to obtain a more stable stock value that is not skewed by random market movements.

The operating cash flow (OCF) used in the denominator of the ratio is obtained through a calculation of the trailing 12-month (TTM) OCFs generated by the firm divided by the number of shares outstanding.

In addition to doing the math on a per-share basis, the calculation can also be done on a whole-company basis by dividing a firm's total market value by its total OCF.

What Does the Price-to-Cash Flow (P/CF) Ratio Tell You?

The P/CF ratio measures how much cash a company generates relative to its stock price, rather than what it records in earnings relative to its stock price, as measured by the price-earnings (P/E) ratio.

The P/CF ratio is said to be a better investment valuation indicator than the P/E ratio because cash flows cannot be manipulated as easily as earnings, which are affected by accounting treatment for items such as depreciation and other non-cash charges. Some companies may appear unprofitable because of large non-cash expenses, for example, even though they have positive cash flows.

Example of the Price-to-Cash Flow (P/CF) Ratio

Consider a company with a share price of $10 and 100 million shares outstanding. The company has an OCF of $200 million in a given year. Its OCF per share is as follows: 

$200 Million 100 Million Shares = $ 2 \frac{\text{\$200 Million}}{\text{100 Million Shares}} = \$2 100 Million Shares$200 Million​=$2

The company thus has a P/CF ratio of 5 or 5x ($10 share price / OCF per share of $2). This means that the company's investors are willing to pay $5 for every dollar of cash flow, or that the firm's market value covers its OCF five times.

Alternatively, one can calculate the P/CF ratio on a whole-company level by taking the ratio of the company’s market capitalization to its OCF. The market capitalization is $10 x 100 million shares = $1,000 million, so the ratio can also be calculated as $1,000 million / $200 million = 5.0, which is the same result as calculating the ratio on a per-share basis.

Special Considerations

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.

There is no single figure that points to an optimal P/CF ratio. However, generally speaking, a ratio in the low single digits may indicate the stock is undervalued, while a higher ratio may suggest potential overvaluation.

The P/CF Ratio vs. the Price-to-Free-Cash Flow Ratio

The price-to-free-cash flow ratio is a more rigorous measure than the P/CF ratio.

Though very similar to P/CF, this metric is considered a more exact measure because it uses free cash flow (FCF), which subtracts capital expenditures (CapEx) from a company's total OCF, thereby reflecting the actual cash flow available to fund non-asset-related growth. Companies use this metric when they need to expand their asset bases either to grow their businesses or simply to maintain acceptable levels of FCF.

Part Of
Guide to Financial Ratios