Price-to-Cash-Flow Ratio

The ratio is calculated by dividing the share price by operating cash flow per share, or equivalently, market capitalization by total operating cash flow.

For example, a company with a market capitalization of 1.2 billion and operating cash flow of 150 million has a price-to-cash-flow ratio of 8.

Some investors prefer cash flow to earnings because it is harder to influence through accounting choices and is not reduced by non-cash charges such as depreciation and amortization. A company with steady profits but weak cash flow may be facing problems, such as customers paying slowly, that the price-to-earnings ratio would not reveal.

A low price-to-cash-flow ratio can suggest a share is good value, while a high one suggests investors expect strong growth. As with other multiples, comparisons are most useful within the same industry.

The ratio does not account for capital expenditure, the money a business must spend to maintain and grow its assets. For that reason, analysts often also look at the price-to-free-cash-flow ratio, which subtracts capital spending.