Series 79: Price–to–Cash Flow Ratio

Price–to–Cash Flow Ratio

The price–to–cash flow (P/CF) ratio is a less-used alternative to the P/E ratio for determining whether a stock is appropriately valued. Some analysts prefer to use P/CF because they believe it is a superior metric for revealing value, and because cash flow is a harder number to manipulate than earnings. In addition, P/CF eliminates distortions caused by the accounting treatment of depreciation, amortization, and other non-cash charges, which reduce earnings even though they do not involve cash outlays. The ratio measures the market’s expectations of future cash flows, rather than its expectations of future earnings growth as the P/E ratio does.