Price/cash flow ratio
What is the price/cash flow ratio?
The price/cash flow ratio measures the relationship between a company's share price and its cash flow. It is calculated by dividing the share price by the cash flow per share. A low ratio may indicate the shares are under valued.
Where have you heard about the price/cash flow ratio?
As an investor, you may have read about the price/cash flow ratio in financial media and investment guides. Your financial adviser may have mentioned it in relation to one or more stocks in which you are invested or in which you are thinking of investing.
What you need to know about the price/cash flow ratio.
Cash flow is a key indicator of financial health in most businesses. It is closely watched by investors, and the price/cash flow ratio is seen as providing important information about the valuation of a company's stock. It can be worked out either by dividing a company's market capitalisation by its total cash flow or by dividing the share price by cash flow per share. Thus a company with a £30 share price and £10 cash flow per share will have a ratio of three, while one with the same share price and £5 cash flow will have a ratio of six. In general, the first company would be seen as better value than the second because the market is not giving it credit for its higher cash flow relative to the price.