The price-to-cash-flow ratio formula
The price-to-cash-flow ratio is the share price divided by cash flow per share: P/CF ratio = share price ÷ cash flow per share. The share price is what one share costs on the market. The cash flow per share is the cash the business throws off per share — usually the operating cash flow per share. 15.00 means fifteen dollars of price for each dollar of cash flow. Try the numbers on the price-to-cash-flow ratio calculator and it does the division for you.
Step 1: find the share price
Start with the market. The share price is what one share costs today — the price on the exchange, not the price you paid for it. Find it on any stock quote page or in your broker app. The price moves every day, so use the price from the same day as the cash flow figure. Here is the worked example: a share price of $150.00.
Step 2: find the cash flow per share
Start with the company’s accounts. Cash flow per share is the operating cash flow divided by the number of shares outstanding. Find the operating cash flow on the cash flow statement — the cash the business generates from its day-to-day work. Find the shares outstanding in the annual report. Here is the worked example: cash flow per share of $10.00.
Step 3: divide and read the answer
Divide the share price by the cash flow per share. Here is the worked example: $150.00 ÷ $10.00 = 15.00. So the stock trades at fifteen times its cash flow. The answer is a plain number — write it as 15.00. A higher number means you pay more for each dollar of cash; a lower number means you pay less.
Three worked examples
Example one — the headline numbers. A share costs $150.00, and the company throws off $10.00 of cash flow per share. The P/CF ratio is $150.00 ÷ $10.00 = 15.00. The market pays $15 for each $1 of cash the business throws off.
Example two — how high a price for a 20.00 P/CF? The same company throws off $10.00 of cash flow per share, and you want a 20.00 P/CF. The share price needed is 20.00 × $10.00 = $200.00. The price-to-cash-flow ratio calculator runs the reverses for you.
Example three — how little cash flow for a 20.00 P/CF? The same company costs $150.00 a share, and you want a 20.00 P/CF. The CFPS needed is $150.00 ÷ 20.00 = $7.50. Less cash flow than that, and the P/CF rises above 20.00.
One reverse to check your answer
Work the numbers backwards. A company throws off $10.00 of cash flow per share, and you want its P/CF to reach 20.00. The smallest whole-cent share price for the P/CF to reach the target is $200.00. A cent less, and the price falls short of the $200.00 needed. The price-to-cash-flow ratio calculator runs the reverses for you.
Share price vs cash flow per share
The share price is what the market charges for the share — the price on the exchange, which moves every day — while the cash flow per share is what the company throws off for each share — the cash from its day-to-day work divided by the shares outstanding. Here is the worked example: a share price of $150.00 and cash flow per share of $10.00 give a P/CF of 15.00. Find the price on the exchange and the cash flow in the cash flow statement.
What a P/CF below 10.00 means
A P/CF below 10.00 means the market pays less than ten dollars for each $1 of cash flow — the market values the business cheaply against its cash. It can mean the stock is cheap — or the cash flow is about to fall. A P/CF below 10.00 is not a buy signal on its own: check whether the cash flow will keep coming and whether the company can fund its dividends from that cash.
What a P/CF at 15.00 means
A P/CF at 15.00 means the market pays $15 for each $1 of cash the business throws off — the market expects the cash flow to keep coming. Here is the worked example: a $150.00 share price on $10.00 of cash flow is a 15.00 P/CF. A 15.00 P/CF is neither good nor bad on its own — the industry decides what that price means. Compare it with the same industry, not with the market as a whole.
What a P/CF above 20.00 means
A P/CF above 20.00 means the market pays more than $20 for each $1 of cash flow — the market expects the cash flow to grow, or the stock is expensive for the cash it throws off. A P/CF above 20.00 is not a sell signal on its own — fast-growing companies trade at high P/CFs. Check whether the growth will arrive before you pay for it.
Operating vs free cash flow
Operating cash flow is the cash from running the business — the cash the day-to-day work generates, before the business pays for new equipment. Free cash flow is what is left after the business pays for the equipment and buildings it needs to keep running. A P/CF built on operating cash flow flatters a capital-hungry business. Use the same cash flow for every stock you compare, and say which one you used. Never mix them: an operating P/CF against a free P/CF is two different measures.
The P/CF vs the P/E
The price-to-earnings ratio is the share price divided by earnings per share — price per dollar of earnings — while the P/CF is the share price divided by cash flow per share — price per dollar of cash. The P/E tells you what the market charges for the earnings; the P/CF tells you what the market charges for the cash. Earnings can be shaped by depreciation and one-off items, while cash is harder to dress up — which is why value investors check the P/CF next to the P/E. Read the guide to the price-to-earnings ratio and try the price-to-earnings ratio calculator and the PEG ratio calculator for the growth side.