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Investment Dictionary


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Price to Cash Flow Ratio

 

Price to cash flow ratio (P/CF) and EV/CF ratio are similar but there are some differences. The main difference is that EV/CF also includes the effect of company’s financial debt which says a different information that P/CF because ignores capital structure (risk) and is more valuable in acquisitions. 

 

However, P/CF ratio is more popular because it is easier to calculate, but might be tricky if company has a lot of debts. Yet, both P/CF and EV/CF might be very useful for companies that are generating stable cash flow and investors that are using this ratio can see how much they are really paying for company’s cash flow. If EV/CF ratio is very attractive (less than 3-4) and there are no reasons for cash flow decrease in the future, then this ratio alone can be a good reason to buy the stock despite the other valuation multiples

 

Price to cash flow calculation


P/CF = Market capitalization / Operating cash flow


EV/CF = Enterprise value / (Operating cash flow + Net financial expenses)


Enterprise value = Market capitalization + Net financial debt + Minority interest + Preferred equity


* Operating cash flow could be adjusted by working capital changes or other non-recurring expenses

 

Another similar valuation multiple is P/FCF ratio (or EV/FCF) which shows company’s price compared to its free cash flow

 






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