Price to Cash Flow Ratio (PCFR or P / CF Ratio) is an investment valuation ratio used by investors to evaluate the attractiveness of an investment from the point of view of a company’s stock. This measurement compares the stock market price to the amount of cash flow generated per company share.
In other words, this Price to Cash Flow ratio shows the amount of money that investors are willing to pay for the cash flow generated by the company.
Please to also read Price to Earning Ratio (PER) definition or Price to Income and its formula.
The price to cash flow ratio is usually used by investors to describe the valuation of a company that is related to one of the most important considerations in the company’s financial statements, namely CASH. It can be said that the Price to Cash Flow Ratio or PCFR Ratio only considers cash flow in its valuation and eliminates non-cash and depreciation factors.
How to Calculate Price to Cash Flow Ratio
Here’s how to calculate the Price to Cash Flow Ratio (PCFR) along with formulas and examples of cases.
Price to Cash Flow Ratio Formula
Price to Cash Flow Ratio can be calculated by dividing the SHARE PRICE (Price per Share) by the CASH FLOW per SHARE (Cash Flow per Share). The Price to Cash Flow Ratio equation or formula can be written as follows:
Price to Cash Flow Ratio = Share Price / Cash Flow per Share
This Price to Cash Flow Ratio can also be calculated using Market Capitalization. The equation or formula can be written as below:
Price to Cash Flow Ratio = Market Capitalization / Cash Flow
Note: Cash Flow per Share can be calculated by adding amortization and depreciation to net income and then divided by the number of outstanding shares. This cash flow can be found in the Annual Cash Flow Financial Statement.
Cash Flow per Share = (Net Income + Depreciation + Amortization) / Number of outstanding shares
Example of calculating the price to cash flow ratio (the ratio of price to cash flow)
As of April 5, 2018, the price per share of ABCD CO is $ 10 (Rp. 3,680), -. Meanwhile, the cash flow per share or cash flow per share of the company with the ABCD issuer is $2 (Rp. 490.) What is the Price to Cash Flow Ratio of ABCD CO?
- Share Price = $10
- Cash flow per share = $2
- Price to Cash Flow Ratio =?
- Price to Cash Flow Ratio = Share Price / Cash Flow per Share
- Price to Cash Flow Ratio = $10 / $2
- Price to Cash Flow Ratio = 5 times
So the Price to Cash Flow ratio or Price to Cash Flow ratio is 5 times.
Analysis and Appraisal of Price to Cash Ratio (Price to Cash Flow Ratio)
Price to Cash Ratio (P / CF Ratio) is the ratio used to compare the market value of a company with its cash flow. A high P / CF ratio indicates the market value of the company or a company’s shares are trading at a relatively high price and may not generate sufficient cash flow. In general, investors will prefer a low P / CF ratio because a low P / CF ratio shows the company concerned has a large cash flow.