# Price-to-Cash Flow Ratio: Definition, Formula, and How to Calculate P/CF

## What Is the Price-to-Cash Flow (P/CF) Ratio?

The Price-to-Cash Flow (P/CF) Ratio offers investors a way to measure a stock's market value against its [operating cash](https://www.investopedia.com/terms/o/operatingcashflow.asp) generation. This useful metric factors in non-cash expenses to present a clearer financial picture, particularly valuable in analyzing companies with large [non-cash charges](https://www.investopedia.com/terms/n/noncashcharge.asp). It serves as a potentially more reliable alternative to the P/E ratio, as cash flows can be less manipulated than earnings figures.

### Key Takeaways

*   The Price-to-Cash Flow (P/CF) ratio is a valuation metric that compares a company's market value to its operating cash flow per share.  
    
*   P/CF is advantageous for evaluating firms with positive cash flow but substantial non-cash expenses that result in reported losses.  
    
*   Analysts may prefer the P/CF ratio over the Price-to-Earnings (P/E) ratio because cash flow is less susceptible to accounting manipulations.  
    
*   A low P/CF ratio can suggest a stock is undervalued, while a higher ratio may indicate possible overvaluation.  
    
*   The optimal P/CF ratio varies by sector and company maturity, reflecting differing growth prospects and stability.

![Price-to-Cash Flow (P/CF Ratio)](https://www.investopedia.com/thmb/HpxZtbZGqyxpH9rNIMj6wMvePcw=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/price-to-cash-flowratio-FINAL-a36fb7221846412887f90048e9c6ab5f.png)

*— Investopedia / Jiaqi Zhou*

## How to Calculate the Price-to-Cash Flow (P/CF) Ratio

﻿ $\text{Price to Cash Flow Ratio}=\frac{\text{Share Price}}{\text{Operating Cash Flow per Share}}$﻿

Using a 30- or 60-day [average price](https://www.investopedia.com/terms/a/averageprice.asp) helps stabilize the stock value by reducing volatility and avoiding random market fluctuations. To calculate the OCF for the ratio, divide the firm's [trailing 12-month](https://www.investopedia.com/terms/t/ttm.asp) OCF by the number of [outstanding shares](https://www.investopedia.com/terms/o/outstandingshares.asp).

The calculation can also be done for the whole company by dividing total [market value](https://www.investopedia.com/terms/m/marketvalue.asp) by total OCF, besides per-share computation.

## Insights From the Price-to-Cash Flow (P/CF) Ratio

The P/CF ratio measures how much cash a company generates relative to its stock price, rather than what it records in earnings relative to its stock price, as measured by the [price-earnings (P/E) ratio](https://www.investopedia.com/terms/p/price-earningsratio.asp).

The P/CF ratio is often a better indicator than the P/E ratio because cash flows are less easily manipulated than [earnings](https://www.investopedia.com/terms/e/earnings.asp). Some companies may appear unprofitable because of large non-cash expenses, for example, even though they have positive cash flows.

## Price-to-Cash Flow (P/CF) Ratio: A Practical Example

Consider a company with a share price of $10 and 100 million shares outstanding. The company has an OCF of $200 million in a given year. Its OCF per share is as follows: 

$\frac{\text{\$200 Million}}{\text{100 Million Shares}} = \$2$

The company thus has a P/CF ratio of 5 or 5x ($10 share price / OCF per share of $2). This means that the company's investors are willing to pay $5 for every dollar of cash flow, or that the firm's market value covers its OCF five times.

Alternatively, one can calculate the P/CF ratio on a whole-company level by taking the ratio of the company’s [market capitalization](https://www.investopedia.com/terms/m/marketcapitalization.asp) to its OCF. The market capitalization is $10 x 100 million shares = $1,000 million, so the ratio can also be calculated as $1,000 million / $200 million = 5.0, which is the same result as calculating the ratio on a [per-share basis](https://www.investopedia.com/terms/p/persharebasis.asp).

## Important Factors to Consider With the P/CF Ratio

The [optimal level of this ratio](https://www.investopedia.com/articles/stocks/11/analyzing-price-to-cash-flow-ratio.asp) depends on the sector in which a company operates and its stage of maturity. A new and rapidly growing technology company, for instance, may trade at a much higher ratio than a utility that has been in business for decades.

Though a tech company may be only marginally profitable, its growth prospects can lead investors to assign a higher value. The utility, on the other hand, has stable cash flows but few growth prospects and, as a result, trades at a lower valuation.

There is no specific optimal P/CF ratio, but a low single-digit ratio may indicate undervaluation, while a higher one could suggest overvaluation.

## Comparing P/CF and Price-to-Free-Cash Flow Ratios

The [price-to-free-cash flow](https://www.investopedia.com/terms/p/pricetofreecashflow.asp) ratio is a more rigorous measure than the P/CF ratio.

Though very similar to P/CF, this metric is considered a more exact measure because it uses [free cash flow](https://www.investopedia.com/terms/f/freecashflow.asp) (FCF), which subtracts capital expenditures (CapEx) from a company's total OCF, thereby reflecting the actual cash flow available to fund non-asset-related growth. Companies use this metric when they need to expand their [asset bases](https://www.investopedia.com/terms/a/asset-base.asp) either to grow their businesses or simply to maintain acceptable levels of FCF.

## The Bottom Line

In summary, the Price-to-Cash Flow (P/CF) ratio offers investors a critical tool for evaluating a company's financial health by comparing its market value to operating cash flow per share. This ratio is especially beneficial for assessing businesses with significant non-cash expenses since cash flows provide a more accurate financial picture than earnings. While a low P/CF ratio might suggest a stock is undervalued, a higher ratio could indicate potential overvaluation. It's essential to consider sector-specific norms and the company's growth prospects when interpreting the P/CF ratio. Investors should also compare it to the price-to-free-cash flow ratio for a comprehensive analysis.