Price-to-Cash Flow Ratio

What is the Price-to-Cash Flow Ratio?

The price-to-cash flow (also denoted as price/cash flow or P/CF) ratio is a financial multiple that compares a company’s market value to its operating cash flow (or the company’s stock price per share to its operating cash flow per share).

Essentially, the price-to-cash flow ratio measures the current price of the company’s stock relative to the amount of cash generated by the company. The price-to-cash flow multiple is primarily used in the comparable analysis method of stock valuation.

Formula for the Price-to-Cash Flow Ratio

From the definition, the price-to-cash flow ratio involves two methods of calculation. First, the multiple can be calculated using the company’s market capitalization. In such a case, the price-to-cash flow formula is the following:

Also, the ratio can be calculated on a per share basis. The price-to-cash flow ratio formula on a per-share basis is:

Applications of the Price-to-Cash Flow Ratio

Similar to other multiples used in stock valuation, the application of the price-to-cash flow ratio is suitable only in certain cases. For example, the use of the operating cash flow in the P/CF ratio makes the ratio a perfect choice to value the stocks of companies with large non-cash expenses (e.g., depreciation).

In certain scenarios, companies with positive cash flows are not profitable due to their large non-cash expenses. The P/CF ratio allows analysts and investors to come up with a less distorted picture of a company’s financial standing.

Although there is no consensus on the optimal P/CF ratio, it is generally accepted that a low multiple indicates a stock is undervalued. High P/CF ratios are common for companies in their early stages of development, when share prices are mostly valued based on future growth prospects and only a small amount of cash is generated.

Generally, the multiple is viewed as a better option for stock valuations than the price-to-earnings (P/E) ratio. One of the main advantages of the P/CF ratio over the P/E ratio is that the company’s cash flows cannot be as easily manipulated as its earnings.

Additionally, when comparing cash-based valuation metrics, understanding P/FCF vs. P/CF helps investors distinguish between operating cash flow and free cash flow available to shareholders after capital expenditures and financing adjustments.

Additional Resources

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

• Earnings Per Share (EPS)
• Market to Book Ratio
• Statement of Cash Flows
• Financial Analysis Ratios Glossary

See all Capital Markets resources

See all Financial Modeling resources

See all Valuation resources