what does the price to cash flow p cf ratio tell you 
the p cf ratio measures how much cash a company generates relative to its stock price rather than what it records in earnings relative to its stock price as measured by the price earnings p e ratio the p cf ratio is said to be a better investment valuation indicator than the p e ratio because cash flows cannot be manipulated as easily as earnings which are affected by accounting treatment for items such as depreciation and other non cash charges some companies may appear unprofitable because of large non cash expenses for example even though they have positive cash flows example of the price to cash flow p cf ratioconsider a company with a share price of 10 and 100 million shares outstanding the company has an ocf of 200 million in a given year its ocf per share is as follows 200 million 100 million shares 2 frac text 200 million text 100 million shares 2 100 million shares 200 million 2the company thus has a p cf ratio of 5 or 5x 10 share price ocf per share of 2 this means that the company s investors are willing to pay 5 for every dollar of cash flow or that the firm s market value covers its ocf five times alternatively one can calculate the p cf ratio on a whole company level by taking the ratio of the company s market capitalization to its ocf the market capitalization is 10 x 100 million shares 1 000 million so the ratio can also be calculated as 1 000 million 200 million 5 0 which is the same result as calculating the ratio on a per share basis special considerationsthe optimal level of this ratio depends on the sector in which a company operates and its stage of maturity a new and rapidly growing technology company for instance may trade at a much higher ratio than a utility that has been in business for decades this is because although the technology company may only be marginally profitable investors will be willing to give it a higher valuation because of its growth prospects the utility on the other hand has stable cash flows but few growth prospects and as a result trades at a lower valuation there is no single figure that points to an optimal p cf ratio however generally speaking a ratio in the low single digits may indicate the stock is undervalued while a higher ratio may suggest potential overvaluation the p cf ratio vs the price to free cash flow ratiothe price to free cash flow ratio is a more rigorous measure than the p cf ratio though very similar to p cf this metric is considered a more exact measure because it uses free cash flow fcf which subtracts capital expenditures capex from a company s total ocf thereby reflecting the actual cash flow available to fund non asset related growth companies use this metric when they need to expand their asset bases either to grow their businesses or simply to maintain acceptable levels of fcf 