Price to Cash Flow Ratio
Price to cash flow (P/CF) is the profitability ratio which is used to compare the price of the company to the underlying cash flow. This is the valuation ratio which uses for the indication of the worth of the company base on the cash flow generated by the company.
Definition: What is Price to Cash Flow Ratio?
In the company or firm P/CF ratio adjust for all the noncash item and it provides the underlying cash picture generated by the business. Price to Cashflow ratio compares the company’s cash flow to its market value to demonstrate if the valuation justified or not.
If the company has a low P to CF ratio then the firm’s potential will be an undervaluation. Now, look that how to calculate the price to cash flow ratio formula.
The price to cash flow ratio can be calculated by dividing the price per share by the operating cash flow per share.
For the calculation of price to cash flow ratio formula, we can use the market cap in the formula as
Price to Cashflow Ratio = Marketing Cash/Operating cashflow
In the annual report of the cash flow statement operating cash flow is mentioned from which we can take and put the value in the above formula
OCF can be calculated by the following formula as
OCF = Net income + Depreciation + Amortization + Change in WC + other non cash item
The price which the share of stock is traded in the open market is called Market Cap.
At the end of the year company Z financial statement taken which has the number in the following table. In the year 2 and year, the operating cash flow of the company increase from 7 to 9 but in these 2 years price to cash flow ratio not change which is 1.7x. P/CF ratio unchanged means the increase in the share by the similar proportion.
It means that the investors of company A pay 2 dollars for every 1 dollar cash flow in the year 1. In the year 3 investors not pay 2 dollars more but pat 1.7 dollars for every 1 dollar cash flow.
Analysis and Interpretation
In the investment industry price to cash ratio is the most important multiple. The analyst needs this ratio to find the valuation of business with respect to cash, the business generates from the underlying operations. From this ratio, we can compare different companies in the same industry.
The analyst needs to examine the short term cash position of the company. They ensure that the management did not set boost adjustment for short term position.