UK Accounting Glossary
The price to cash flow ratio is computed as the Stock Price ÷ (Cash Flow ÷ Outstanding Shares). The cash flow component of the price to cash flow ratio comprises net income as well as noncash charges, most notably depreciation. The outstanding shares component of the price to cash flow ratio represents shares held by investors and excludes shares repurchased and held by the company.
The price to cash flow ratio is a popular method to value stocks. Some analysts consider the price to cash flow ratio superior to the better-known price to earnings ratio. The price to cash flow ratio measures how investors value a company’s ability to generate the ultimate “hard” asset (namely, cash), rather than an accountant’s definition of profit (namely, earnings). The price to cash flow ratio is also often considered a better indicator for comparing valuations across sectors since the price to cash flow ratio is less susceptible to variations in industry accounting practices.
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This glossary post was last updated: 6th February 2020.