Keyword: Price-to-Cash-Flow Ratio (P/CF)

Is calculated by dividing the per-share price of a company’s stock by its per-share operating cash flow. Cash flow is earnings plus all non-cash deductions from earnings, such as depreciation, depletion, deferred taxes, etc. and therefore it is almost always higher than earnings; thus a p/cf for a company’s stock will invariably be at least equal to or lower than its p/e ratio. Some investors favour the use of p/cf as an evaluation tool because accounting rules and guidelines make it less easy to manipulate the reporting of cash flow and it also helps investors compare companies internationally by removing varying jurisdictional practices from the calculation of deductions from earnings. Investors should also be aware that some companies include changes in current assets and current liabilities when they calculate their cash flow. This approach is apt to misrepresent their true cash flow and underlying financial performance. In these cases, investors should add back the “Changes in non-cash operating working capital” when calculating cash flow.