Price to cash flow ratio is a comparison of current market price per share with operating cash flow per share. It’s considered as part of the profitability ratio. Price to cash flow ratio or P/CF measures how much an investor is willing to pay for per share operating cash flows of the company.
To calculate P/CF ratio, you need to divide market price per share by the operating cash flow (OPCF) per share.
Price to cash flow ratio = current market price per share / OPCF per share.
You can also calculate it by dividing market capital of the company with the OPCF. Market capital can be calculated by multiplying current market price per share with the number of shares outstanding.
Why to calculate price to cash flow ratio
Price to earnings ratio (P/E) is calculated to measure the multiplication in which investors are willing to pay for a stock in comparison to company’s earnings per share or EPS. It’s a good measure but does not hold good for all type of companies.
Due to accrual basis of accounting, the net profit in income statement does not always equal to the OPCF of a company. A company may be showing huge profit in income statement but may unable to pay its short-term obligations due to cash shortage.
One of the reason why net profit can’t be considered in this calculation is because of noncash transactions in income statement. In this type of cases, company will be showing low profit in income statement with a net positive cash inflow to the business. Due to this reason its mandatory for all listed company to publish statement of cash flow along with income statement and balance sheet. In this statement, you adjust all noncash expenditure to the net earnings to find out cash flow from operating activities.
As discussed above, investors take OPCF from the statement of cash flow and compare it with the market value per share to understand the relationship.
You can use following formula to find out OPCF in case its not available:
OPCF = net earnings + depreciation + other noncash expenses + change in working capital + amortization
To get per share OPCF, you need to divide OPCF by number of shares outstanding.
As discussed in our earlier articles, no single ratio can give you complete picture of the company’s profitability. To know company’s liquidity position, profitability, activity and financial leverage following ratios can be used;