Price/Cash Flow Ratio

The Price/Cash Flow (P/CF) ratio is a valuation metric that compares a company's market price to its cash flow per share. It is calculated by dividing the company’s market capitalization by its operating cash flow or by dividing the stock price by the cash flow per share. The P/CF ratio helps investors evaluate how well a company’s stock price aligns with its cash-generating ability. A lower P/CF ratio may indicate that a stock is undervalued relative to its cash flow, while a higher ratio suggests the opposite.

Example

A company with a stock price of $50 and a cash flow per share of $10 has a P/CF ratio of 5, suggesting that investors pay $5 for every dollar of cash flow.

Key points

• Compares a company’s market price to its cash flow per share.

• Helps assess whether a stock is undervalued or overvalued based on cash generation.

• Lower ratios suggest better value relative to cash flow.

Quick Answers to Curious Questions

Why do investors use the P/CF ratio in valuation?

It provides insight into how much investors are willing to pay for the company’s cash-generating ability, which is crucial for long-term sustainability.

How does the P/CF ratio differ from the P/E ratio?

The P/CF ratio focuses on cash flow, while the P/E ratio compares price to earnings, making the P/CF more useful for companies with significant non-cash expenses.