You may have heard these terms thrown around, but what do they actually mean? If you have this question, you’ve come to the right place. In this post, we’re going to go over what the price-to-cash-flow ratio is, why it is important, and how to calculate it, so keep reading.

What is the price-to-cash-flow ratio?

The P/CF ratio or the price-to-cash-flow ratio is key metric investors use to determine whether a company is over or undervalued. It’s also useful for comparing companies in different industries, as well as for comparing stocks with different payout ratios and interest rates on their debt. The price-to-cash-flow ratio (or P/CF) compares the stock price against the amount of cash that the company generates per share each year.

\text {P/CF} = \frac {\text {Cash flow per share}} {\text {Price per share}}

This ratio can be calculated using either trailing or forward earnings—the choice depends on what information is available when you’re looking at the number. If a company hasn’t yet reported its earnings for the last quarter or year, then you can take last year’s results and estimate what this year’s numbers will likely be. Alternatively, if your goal is to compare one stock against another (rather than assess whether either one is cheap), it may be easier just to use forward earnings rather than historical ones when calculating P/CF ratios because they’re less likely to be affected by factors like accounting policies change over time.

What is it used for?

This ratio measures the value of a company’s shares against its total cash flow per share. The price-to-cash-flow ratio is key metric investors use to determine whether a company is over or undervalued. It does this by dividing the company’s stock price by its cash flow per share. The result can then be compared to others in the same industry or the whole market.

However, it is also possible to use this metric when comparing one company against another that operates in a different sector of the economy – provided both firms have reported their turnover figures in current terms (i.e., accounting for inflation) rather than nominal terms (i.e., not accounting for inflation). This will enable you to compare what each firm earns per pound of sales revenue generated over time as well as between industries.

How to use the price-to-cash-flow ratio calculator

Our price-to-cash-flow ratio calculator uses the formula we mentioned before, which is:

\text {P/CF} = \frac {\text {Cash flow per share}} {\text {Price per share}}

However, if you don’t know the exact cash flow per share, but you do know the overall cash flow and the number of shares, you can use that in the calculation as well.


What is a good price-to-cash flow ratio?

Anything below 10 is good. Essentially, the lower the ratio, the better.

What does a high price-to-cash flow ratio mean?

It means the company in question is not generating enough income to support the multiple.

How is the price-to-cash flow ratio calculated?

It is calculated using the formula PCFR = Cash flow per share / Price per share.