What is price-to-cash flow ratio?
It is a stock valuation indicator that measures the value of a stock’s price to its cash flow per share. The ratio takes into consideration the stock’s operating cash flows, which adds non-cash earnings such as, depreciation and amortisation, to net income. It is especially useful for valuing stocks that have positive cash flows, but aren’t profitable because of large non-cash charges. The price-to-cash flow ratio is calculated by taking the current share price and dividing the total cash flow from operations found on the cash flow statement.
Where is this ratio useful?
It is useful in certain sectors like drug companies where analysts make adjustments for drugs in development and drugs that will be soon subject to generic competition and other factors so that they can estimate the funds available to share holders during any given year.