Price/cashflow is simply the share price divided by the cashflow per share

Using it obviously requires selecting a cash flow measure. Given the comparison to share price one that is post-interest is preferable.

This valuation ratio is not as widely used as its profit based equivalent, the PE ratio. Although cash flows are what ultimately matter most to investors there are problems with using cash flow based ratios. Most cash flow numbers are subject to more fluctuation than profits and therefore EPS tends to be more sustainable than cash flow per share. The obvious exception to this is EBITDA which is a profit measure that is closely related to cash flows, but when EBITDA is used it is preferable to use EV/EBITDA for valuation.

Cash flows are, of course, what would be used for a DCF valuation, but using them with simple ratios has too many pitfalls to be lightly recommended as a substitute for profit based ratios. They nonetheless make a good additional measure to be used in conjunction with PE and EV/EBITDA

Copyright © 2005-2016