Price to Cash Flow Ratio Calculator
Our price to cash flow ratio calculator aims to help you calculate the P/CF ratio using the price to cash flow ratio formula. This metric will help you analyze if a company is overvalued or undervalued compared to its peers.
This article will explain what is the price to cash flow ratio and how to calculate the price to cash flow ratio. Furthermore, we will help you to understand what is a good price to cash flow ratio. Keep reading if you want to analyze the attractiveness of different companies.
What is the price to cash flow ratio (P/CF ratio)?
The price to cash flow ratio, more commonly known as the P/CF ratio, is an investment metric that ties a company's cash flow to its share price. You may be familiar with its more famous peers, the P/E ratio and the P/S ratio, which relate income statement metrics such as the sales and net profit. Unlike them, the price to cash flow ratio links the share price to a cash flow statement metric.
This metric is usually applied to identify companies that are undervalued. Interested in knowing how? Allow us to use an example to help you understand what is a good price to cash flow ratio.
How to calculate the price to cash flow ratio (P/CF ratio)?
Let's look at the information of Company X:
- Name: Company X;
- Most recent cash flow:
- Number of shares outstanding:
- Price per share:
The calculation of the price to cash flow ratio only requires 5 steps:
- Obtain the price per share of the company
This information can be obtained directly from various sources such as Google, Yahoo Finance, Bloomberg, etc.
In our example, the
price per shareof Company X is
- Obtain the most recent cash flow of the company
Unlike obtaining the sales and net profit figures, which you can get from the company's income statement, obtaining the cash flow figures requires you to look for the cash flow statement instead. But worry not, the good news is that you can also find the cash flow statement in the company's annual report.
For our example, we have assumed Company X to have a cash flow figure of
- Obtain the number of shares outstanding of the market
The number of shares outstanding is defined as the number of shares of the company traded in the market. You can obtain this information using various sources. You can either search it on Google or get it directly from the companies annual reports. We assume that Company X has
1,000,000 shares outstandingin this example.
- Calculate the cash flow per share of the company
Cash flow per share can be calculated by dividing the company's most recent cash flow figure by its number of shares outstanding:
cash flow per share = cash flow / number of shares outstanding
So, in our example,
cash flow per share = $2,000,000 / 1,000,000 = $2.00.
- Calculate the price to cash flow ratio of the company using the price to cash flow ratio formula
You can calculate the
price to cash flow ratioby using the following formula:
price to cash flow ratio = price per share / cash flow per share
price to cash flow ratioof Company X is
$50 / $2 = 25x.
This means that the price per share is overvalued by a factor of 25. If Company Y had a price to cash flow ration of
x10, all else being equal, it would be better to invest in Company Y as you're getting more value for your money.
Advantages of price to cash flow ratio (P/CF ratio)
Using the price to cash flow ratio allows you to analyze the ability to generate cash. Unlike net profit, which is essentially an accounting number, cash flow represents the amount of cash a company actually generates.
What's more, cash flow is also harder to manipulate. Thus, it can better reflect the intrinsic value of the company.
Disadvantages of price to cash flow ratio (P/CF ratio)
Besides realizing the strengths of the price to cash flow ratio, it is also crucial to understand its weaknesses. Having multiple definitions of cash flow is probably the biggest weakness of this investment metric. Although free cash flow is most commonly used, in some cases, operating cash flow and free cash flow to equity (FCFE) might be more suitable.
Moreover, as the cash flow figures can be negative, you can only use this metric for companies with positive cash flow. This has limited the usability of this metric in a lot of cases.