How to Calculate Price-to-Cashflow Ratio in the Stock Market

The stock market has historically been a wise investment. However, that does not mean that each potential investment carries the same risk and reward. An investor needs measurement tools in order to invest wisely in the stock market. One such tool is the price to cash flow ratio.

Instructions

1. Determine the cash flow per share of the publicly traded company. To calculate cash flow per share, take Operating cash flow of a company and subtract preferred dividends.

2. Obtain the operating cash flow of a corporation. The calculation for operating cash flow is as follows: EBIT (Earnings before Income Taxes) plus depreciation minus Taxes. Operating cash flow is a measure of the cash generated by a company.

3. Calculate the Cash flow per share figure of the corporation. Take the operating cash flow established in the previous step, subtract preferred dividends and then divide the number by common shares outstanding. The preferred dividends and common shares outstanding figure are available on any company website or financial site.

4. Divide the share price of the company by the cash flow per share. The price to cash flow takes out the variable of depreciation and therefore can be a better indicator of a corporation's financial health. It is difficult for a company to mask their cash flow. In this financial era of questionable accounting tactics, this is a useful financial measurement tool. Evaluating foreign companies is easier when using this ratio. Foreign corporations operate under various accounting rules that are difficult to ascertain.