How to Calculate the Price-to-Cash-Flow Ratio
Determining the equity of a company can be done by calculating price multiples. Some of these methods, in being easy to use, have become popular amongst retail and institutional investors. Price-to-book, price-to-sales and price-to-earnings are some of the price metrics that are taken into consideration, and among them is another metrics known as the price-to-cash-flow.
Simply put, the price-to-cash-flow (P/CF) evaluates the price of a company’s stock as opposed to how much cash flow the company is generating.
The formula is P/CF, with P, being the current share price of the company but taking an average of the price for a period of 30 to 60 to avoid volatility that occurs due to market movements from time to time.
In the denominator, we can find the cash flow by calculating the 12-month cash flows and then dividing it by the number of shares outstanding.
For example, if company XYZ has a 30-day average stock price for $ 20 and almost $ 1 million was generated in terms of cash flow within the last 12 months and 200,000 outstanding shares, the cash flow per share would $5 ($ 1000000/200000).
The next step to determine the P/CF ratio would be to divide $ 20/ $5, and this value would also be obtained if the market cap of the firm was divided by its cash flow for the same period. Also known as the P/E ratio, this simple calculation can be revealing but to be honest, no single ratio will give you a complete picture.