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A valuation ratio intended to estimate a company’s value.[sc:kit02 ]
Price to Cash Flow Formula
Explanation of Price to Cash Flow
The Price to Cash Flow ratio is a quick way to value a company by looking at the level of cash flow it creates and comparing this to the market capitalization of the company (stock price times the total number of shares outstanding).
Importance of Price to Cash Flow
A high, or increasing Price to Cash Flow ratio is a positive sign, as less cash flow is required to maintain a stock price at a certain level. Caution should be used this ratio, as the stock price also can be influenced by external events such as market condition changes and the overall public opinion of the company, as well as internal events such as changes in sales. Since the Market Price of Common Stock is multiplied by the Average Shares Outstanding, even modest changes to the stock price can impact the results of this ratio.