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Price - Cash Flow Ratio (P/CF)

How much do you pay for one rupee of a company's cash flow? This is what the price to cash flow ratio, or PCF ratio, tells us. For example, a stock with a PCF ratio of 25 means you are paying 25 rupees for one rupee of cash. The higher the PCF, the more you are paying for a rupee of cash, and the more expensive the stock.

A company's cash flow and a company's earnings are closely related. There are three sources of differences. The first difference comes from non cash earnings such as depreciation. The second difference comes from cash used for investing in a company's future growth. The third difference comes from cash used to pay dividends to shareholders.

Even though a company's cash flow and earnings are not the same, they should follow each other closely. If you notice a company's earnings going up, but its cash flow going down, then this should be investigated closely. Sometimes this could be the case for a fast growing company that uses its cash for expansion. This may be a good thing if the company has good investment opportunities. It may be a bad thing if they are investing in bad projects.

It is also possible that earnings are manipulated. Cash is more difficult to manipulate than earnings, and this can cause a divergence between the two.

Sometimes, you will see a term called cash earnings per share. This is slightly different to total cash flow. Cash earnings per share only looks at cash generated from regular operations. It does not include cash for investments or dividends. The cash earnings per share should be closest to the actual earnings per share.

The Price - Cash Flow Ratio Formula

The PCF ratio is the market price per share divided by the cash flow per share. The market price per share is simply the stock price.

PCF ratio = market price per share / cash flow per share

Calculating the Price - Cash Flow Ratio, An Example

Suppose Baja Auto's current stock price is Rs 3,135. And their most recent cash flow per share is Rs 143. Using our formula gives us a PCF ratio of 21.9.

Bajaj Auto PCF = Rs 3,135 / Rs 143 = 21.9

Comparing Price - Cash Flow Ratio with Other Indicators

How does the PCF ratio compare to other indicators, such as price to earnings (PE) or price to book value (PBV)? As discussed, a company's cash flow and earnings are closely related. Typically, the PE ratio is more commonly used than the PCF ratio to value a company. The PCF is valuable in cases where there is a large divergence between earnings and cash flow.

The PBV ratio is the market price per share divided by the book value per share. The book value per share is the value left over if a company's assets are sold and its debts are paid off. It is mostly relevant for firms close to liquidation. If earnings and cash flow are negative, the PE and PCF ratio are both meaningless. In this case, PBV can be used instead.

The biggest advantage of the PCF ratio over both PE and PBV is that cash is difficult to manipulate. Earnings can be manipulated with non cash items such as depreciation or aggressive accruals. The book value can be manipulated with balance sheet items whose current value is not the same as the value stated on the accounts. This is why the PCF ratio is so useful. It allows us to ensure that there is real cash behind a company's earnings.

India's Most Attractive Companies Based on Price to Cash Flow Ratio

In this live data section, you can find the stocks with the most attractive PCF ratios.

SCRIP* P/CF(x) GET MORE INFO
JSW STEEL 0.6  More Info 
TATA COFFEE 0.8  More Info 
UNITED BANK OF INDIA 0.9  More Info 
ALLAHABAD BANK 1.0  More Info 
CORPORATION BANK 1.1  More Info 
BANK OF INDIA 1.1  More Info 
ANDHRA BANK 1.3  More Info 
ORIENTAL BANK 1.4  More Info 
DENA BANK 1.4  More Info 
ARSS INFRASTRUCTURE 1.4  More Info 

The Stock Screener runs on Equitymaster's own database, which comprises India's leading 578 companies.
*Data is consolidated wherever applicable

>> Here's the full list of India's most attractively valued companies


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