Price to cash flow ratio

The price to cash flow ratio (PCF) is a measure of the market’s expectation of a firm’s future health. It is calculated by dividing the share price by the cash flow per share.

Like the price to earnings ratio (p/e), the PCF ratio is one that investors look at to calculate the relative cost of a business or a market. It represents the number of years of free cash flow needed to recoup the price of shares.

The idea is notional, as only a dividend rather than the full cash flow will ever be returned to investors – but it still gives an easy comparison with other companies or market, regardless of size. The future (forecast) cash flow can also be used to calculate the PCF.

The benefit of PCF over, say P/E is that it is harder to fudge the numbers, making it an increasingly popular ratio.

Merryn

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