Price-to-cash-flow (P/CF) ratio

Definition

The price-to-cash-flow (P/CF) ratio measures the value of a company's stock relative to its operating cash flow per share. It is used to assess whether a stock is undervalued or overvalued based on the company's cash-generating ability.

5 Must Know Facts For Your Next Test

1. P/CF ratio is calculated by dividing the market price per share by the operating cash flow per share.
2. A lower P/CF ratio may indicate that a stock is undervalued, while a higher ratio may suggest it is overvalued.
3. The P/CF ratio is considered more reliable than the P/E ratio during periods of high non-cash expenses or revenues.
4. Investors use the P/CF ratio to compare companies within the same industry, as different sectors have different natural cash flow levels.
5. Unlike earnings, cash flow figures are harder for companies to manipulate through accounting practices.

Review Questions

• How do you calculate the price-to-cash-flow (P/CF) ratio?
• Why might investors prefer using the P/CF ratio over the P/E ratio?
• What does a lower P/CF ratio signify about a company's stock valuation?

Related terms

Price-to-Earnings (P/E) Ratio: Measures a company's current share price relative to its per-share earnings.

Operating Cash Flow: Cash generated from normal business operations.

Valuation: The process of determining the present value of an asset or company.