P/CF – Price-to-Cashflow Ratio

What Is the P/CF Ratio?

A company's cashflow reflects actual payment flows over a specific period. Compared to the P/E ratio, the price-to-cashflow ratio (P/CF) is less susceptible to accounting manipulation. The P/CF ratio allows statements about how the stock price relates to a company's liquidity, and can assess the earnings-power development of a public company.

On average across a broad stock market, P/CF values between 15 and 18 are considered fairly valued. Lower values are considered cheap.

Calculation

Finanzoo Calculation (P/FCF)

Finanzoo calculates the score based on free cash flow per share relative to the stock price (P/FCF – price-to-free-cashflow ratio). For extended periods with negative free cashflow, points are deducted. In the Finanzoo F-Score, P/FCF is the most heavily weighted ratio at 22%.

Interpretation

With cashflow, only real payment flows are the focus – profit metrics take a back seat. The overarching goal of an investor can be a high inflow of cash at low stock prices. Investors generally consider a lower P/CF value to be more favorable.

A low P/CF can arise when a company's cashflow is very high compared to its profit. For example, if a company's operating cashflow is 1 million euros at a market value of 10 million euros, this results in a P/CF of 10. This allows investors to assess how much liquidity a company generates relative to its market valuation. A company with a P/CF of 5, for example, generates a cashflow of 20 cents for every euro of stock price – which is very attractive.

How Does the P/CF React to Changes?

Conclusion

The P/CF ratio is a more robust alternative to the P/E ratio, since cashflow is harder to manipulate. Combined with P/B ratio, equity ratio and dividend yield, this gives a well-rounded picture of fundamental company valuation.