A financial multiple that compares the company’s market value to its operating cash flow
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 regarding the optimal levels for the P/CF ratio, it is commonly accepted that a low multiple indicates that a stock is undervalued. High P/CF ratios are common for companies in their early stages of development when the share price is mostly valued based on their future growth prospects while a small amount of cash is generated.
Generally, this multiple is viewed as a better option that can be used in stock valuations relative to 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.
More 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:
FAQs
Price to Cash Flow Ratio Formula (P/CF)
What is a good price to cash flow ratio? ›
A good price-to-cash-flow ratio is any number below 10. Lower ratios show that a stock is undervalued when compared to its cash flows, meaning there is a better value in the stock.
What is a good FCF ratio? ›
As a starting point, a Free Cash Flow ratio above 1 is considered favorable for any company. This implies that the business is generating enough cash to more than cover its operating expenses and investments, a key indicator of financial health.
What is a good ratio for cash flow? ›
Operating cash flow ratio
This ratio calculates how much cash a business makes from its sales. A preferred operating cash flow number is greater than one because it means a business is doing well and the company has enough money to operate.
What does price to cash ratio tell you? ›
The price-to-cash flow ratio (P/CF) is a valuation method that measures how much cash a company is generating relative to its stock price.
What is a bad cash flow ratio? ›
A cash flow ratio of less than one indicates the opposite—the firm has not generated enough cash to cover its current liabilities. To investors and analysts, a low ratio could mean that the firm needs more capital. However, there could be many interpretations, not all of which point to poor financial health.
What is the justified price to cash flow ratio? ›
The justified cash flow ratio represents the 'fair' value based on a company's fundamentals. If the current ratio deviates significantly from the justified ratio, it might indicate overvaluation or undervaluation, guiding investors on potential investment decisions.
What is Tesla's FCF ratio? ›
As of today (2024-09-03), Tesla's share price is $210.60. Tesla's Free Cash Flow per Share for the trailing twelve months (TTM) ended in Jun. 2024 was $0.49. Hence, Tesla's Price-to-Free-Cash-Flow Ratio for today is 429.80.
What is a healthy free cash flow? ›
To have a healthy free cash flow, you want to have enough free cash on hand to be able to pay all of your company's bills and costs for a month, and the more you surpass that number, the better. Some investors and analysts believe that a good free cash flow for a SaaS company is anywhere from about 20% to 25%.
Is a higher or lower FCF better? ›
Key Takeaways. A higher free cash flow yield is ideal because it means a company has enough cash flow to satisfy all of its obligations. If the free cash flow yield is low, it means investors aren't receiving a very good return on the money they're investing in the company.
A cash ratio lower than one does sometimes indicate that a company is at risk of having financial difficulty. However, a low cash ratio may also be an indicator of a company's specific strategy that calls for maintaining low cash reserves, such as because funds are being used for expansion.
What is a good cash flow value? ›
Interpretation of Operating Cash Flow Ratio
A higher ratio – greater than 1.0 – is preferred by investors, creditors, and analysts, as it means a company can cover its current short-term liabilities and still have earnings left over.
What is a good cash flow rate? ›
A common benchmark used by real estate investors is to aim for a cash flow of at least 10% of the property's purchase price per year. For example, if a property is purchased for $200,000, the annual cash flow should be at least $20,000 ($1,667 per month).
What is a good price to ratio? ›
Typically, the average P/E ratio is around 20 to 25. Anything below that would be considered a good price-to-earnings ratio, whereas anything above that would be a worse P/E ratio. But it doesn't stop there, as different industries can have different average P/E ratios.
What if price-to-cash flow is negative? ›
Negative cash flow is when your business spends more than what it receives, but this need not always indicate a loss. For example, your payments may be due before you receive your income and you may spend more than what you have at that time, leading to a cash flow problem.
What is a reasonable price to value ratio? ›
P/B Ratios and Public Companies
Traditionally, any value under 1.0 is considered desirable for value investors, indicating an undervalued stock may have been identified. However, some value investors may often consider stocks with a less stringent P/B value of less than 3.0 as their benchmark.
What is a good price free cash flow value? ›
A good price to free cash flow ratio is one that indicates its stock is undervalued. A company's P/FCF should be compared to the ratios of similar companies to determine whether it is under- or over-valued in the industry it operates in.
What is a good sales to cash flow ratio? ›
What is a good cash flow to sales ratio? A cash flow to sales ratio is considered good if it falls between 10% and 55%.
