Understanding Price-to-Cash Flow from Operation Ratio
The Price-to-Cash Flow from Operation ratio compares the company's stock price with its operating cash flow per share. Cash flow can't be easily manipulated compared to earnings, which is the importance of this ratio. This ratio indicates how much investors are willing to pay for each rupee of operating cash generated by the company. Many investors used Price to Cash Flow from Operation to analyze whether the company is undervalued or overvalued.
The formula to derive Price-to-Cash Flow from Operation ratio
Current Price - It is the most recent selling price of stocks. The current price indicates the current value of the stocks, and it is also known as market value.
Cash Flow from Operation Per Share - This metric is calculated as a Cash flow from operations divided by Outstanding shares. It indicates how much cash flow the company is generating on a per share basis.
Example of Price to CFO: The current stock price of Hindalco Industries limited is Rs. 449.75 Cr., and Cash Flow from Operations per share is Rs. 77.25 Cr.
The value as per the formula (Current Price / Cash Flow from Operation) is calculated as (449.75 / 77.25) = 5.82.
Key Highlights
The Price-to-Cash Flow from Operation (Price to CFO) ratio is calculated as Current Stock Price divided by Operating Cash Flow Per Share.
It is more useful for valuing the company's stock that has positive cash flow from the operation but is not profitable due to high non-cash expenses.
Price to CFO indicates whether the company's stock is overvalued or undervalued.
While looking at the Price-to-Cash Flow from Operation, the following points should also take into consideration:
A low Price to Cash Flow from Operation ratio indicates that the company is undervalued. Stocks with a low ratio are considered more valuable. A high ratio indicates that the company is overvalued and is not generating enough cash flow.
Many investors look at the Price/CFO ratio because cash flow from the operation is not easy to manipulate.
It is more useful for valuing the company's stock that has positive cash flow from the operation but is not profitable due to high non-cash expenses.
Many investors look at the Price to CFO ratio because it takes cash flow from the operation into accounts, and the company cannot manipulate it easily. This metric gives a more accurate value than P/E Ratio because the company's earnings can be manipulated by factors like depreciation and other non-cash charges. And cash flow does not include non-cash factors, so it does not affect it.
Even if this ratio gives an accurate value, we can apply this metric in certain scenarios. For example, we can use this metric for companies with large non-cash expenses.
How to use the Price to CFO ratio effectively
Investors should look for the low Price to CFO ratio. It indicates that the stock of a company is undervalued.
This metric is more useful to value the company that has positive cash flow, but due to large non-cash expenses, the company is not profitable.
For better analysis, we cannot depend on one particular ratio. So use other metrics with Price to Cash Flow from Operation ratio like
Price to Sales,
Free Cash Flow to Revenue,
PE Ratio,
PB ratio, etc.,
