Price to Cash Flow Ratio - Explained in Hindi | #46 Master Investor - YouTube

Press the bell icon while subscribing

so that you get a notification for the latest finance video.

Namaskaar! My name is Mukul and welcome to Asset Yogi.

Friends this video is part of a series in which we're discussing valuation ratios.

Now when you analyze any stock

if it is fairly priced, overly priced, or underpriced?

Then you have to calculate valuation ratios.

I've already made a lot of videos on that

like earning per share, P/E ratio, PEG ratio

price to book value ratio.

If you haven't watched those videos then I'll suggest that you watch them.

You'll get the links down in the description.

In this video, we'll discuss another important ratio,

which is the price to cash flow ratio.

Normal investors generally don't use this ratio,

Professional investors use it more when they

want to analyze in-depth.

I'll tell you when you have to use it generally.

See earning, means profits can be manipulated.

Non-cash heads like depreciation and amortization come in it.

If you are depreciating any asset.

then the cash is not going out of your company. RIght!

So if you do more depreciation in a year

then the difference between earnings and operating cash flow comes a lot.

So if there is a large difference in earnings and cash flows then

then you definitely should calculate the price to cash flow ratio.

And if we compare it to price to book value as well,

then book value can be manipulated as well, because

there is an amount of depreciation in it.

So if you take out the value of the assets,

whatever value is taken in the books or account

it's possible you might not sell assets at that price in the market.

So that's why book value is also not that good indicator.

But when you calculate the price to cash flow,

then cash can't be manipulated.

That's why it becomes a strong value and you must analyze it.

So in this video how do you have to calculate the price to cash flow?

How do you have to interpret it?

We'll understand that. And how can you calculate it online?

So stay tuned till last. Let's go straight to the blackboard.

What's the formula of the price to cash flow ratio?

Share price divided by Operating cash flow per share.

What is the share price?

Whatever stock you are analyzing, its current market price you have to take in the numerator.

and operating cash flow you get from the cash flow statement.

See, to some extent price to cash flow works same as P/E ratio,

In it we saw, we take share price in the numerator,

and in the denominator, we take earning per share.

Earning per share means net profit divided by the total number of shares, so you get a share's

earning, how much the company is earning on one share.

So earning per share and operating cash flow per share are very closely related.

When there is too large of a difference between them, only then

the importance of the price to cash flow ratio increases a lot.

Otherwise, you can just analyze the P/E ratio of any stock.

Sometimes we get to see another variation of this.

Divide share price by free cash flow per share instead of operating cash flow.

In fact, I find this formula to be better because in free cash flow

we consider capital expenditure also.

So when you take out capital expenditure from operating cash flow, then you get free cash flow.

Now there can be another variation of this.

Just take market capitalization instead of share price in the numerator.

and divided by total free cash flow

so you won't need to take out per-share free cash flow.

So you can use any of the two formulas.

So in this video, I'll mainly this or this formula.

Mainly I'll use free cash flow. Otherwise Operating cash flow can be used too.

But from free cash flow, we get a better picture of where cash is going.

Now,

Basically, what do you have to be careful of, whenever net profits or earnings

and operating cash flow has a high difference.

Operating cash flow or if you're considering free cash flow,

so the difference is quite high in those,

then you must calculate the price to cash flow.

Let's understand why I am saying this.

See, the typical profit and loss statement looks like this.

You take out the cost of goods sold from revenue and you get the gross proft

And you take out marketing and sales, office and admin means operating expenses

then you get EBITDA.

Then any company takes out depreciation and amortization,

Then we get EBIT.

Then you take out interest in that, whatever interest the company has to pay,

so you get profit before taxes.

Then you take out taxes so you get net profit, which means earnings.

In the P/E ratio, these earnings are considered.

Now see, here,

Remember one thing, whatever costs of goods sold, expenses, operating expenses, or interest,

or even the tax,

these are fixed. The company can't manipulate them.

But deprecation or amortization can be manipulated sometimes.

because these are non-cash items.

You can take them as whatever. You can depreciate some assets in 5 years,

some assets you can depreciate in 10 years.

So it's dependent on the company.

Now the earnings can be manipulated from here, so

you sometimes don't get a good picture from the P/E ratio.

So that's why we use cash flow.

How does a typical cash flow statement look?

Depreciation is added back in profit before taxes.

Why is it done? Because it is a non-cash item.

See, the depreciation here is non-cash.

All the other things are deducted in cash. They are the actual expenses.

But it depends on the company, how much it is depreciating any asset.

After that, taxes are deducted, working capital is deducted

so you get the operating cash flow.

Here you can calculate either price is to operateing cash flow,

if you're calculating the price to cash flow ratio.

But according to me, free cash flow is better because

in it, you deduct the capital expenditure also.

Whatever operating cash flow you got, from that the company

might have used some of it in plant and machinery or expansion.

When you deduct that also, you get free cash flow.

So according to me, if you take out the price to free cash flow, then it's better

Let's take an example. Assume

The operating cash flow of a company is 100 crores

and let's say net profit was 80 crores.

It's possible that the company considered too much depreciation.

So you'll suddenly know where the cash is going actually.

Second, it's possible that the company did a lot of capital expenditure.

90 crores out of 100, might be spent on plant and machinery or expansion.

So this thing is not getting cleared by earnings.

When you are analyzing the P/E ratio, you don't get to know where the cash is going.

That's why, when you calculate the price to free cash flow ratio

then the picture gets clear at once.

So once you calculated the price to free cash flow ratio, then what will you do?

Basically, you have to see that, the price to free cash flow ratio

the lower it is, the better returns you'll get.

In research, it has been seen that whatever companies' price to free cash flow ratio is low,

historically those companies have given more returns.

So I think the concept of price to free cash flow ratio is clear to you now.

Now let's quickly check online how do we have to calculate this ratio?

Here I have taken out financials of Asian Paints from the Moneycontrol website.

You can take out any company's financials by going in search.

Let's come a bit down here.

We get market capitalization directly,

what is the total market value of the company,

on the stock market.

So the market capitalization here is around 120,494 crore Rs.

And we directly got the price earning ratio, which is 55.53

Now we have to calculate the price to cash flow ratio.

We want to see if it's equal to the price earning ratio

or there is a big difference in earnings and operating cash flow.

For that, we'll have to go to the cash flow statement in the financials.

So I'll go to the cash flow statement here.

Now see what are we getting here?

Cash from operating activities we are directly getting, 2136 crores.

After that, we're directly getting the cash flow of investing activities.

So to get the price to operating cash flow, we

need market capitalization in price so

we'll directly write market capitalization here,

which we saw as 120494 crores.

divided by, we'll write cash flow from operating activities.

So how much is it total? 2136 crores.

If you calculate this value then it'll come out as 56.4

How much did we see P/E ratio? It was around 55.5

So there is no significant difference between operating cash flow and earnings.

So we can see, here

cash has not been manipulated much here and there.

But we should see the price to free cash flow ratio as well.

how much money is the company spending on capital expenditure?

Here we can directly see net cash from investing activities

but we're not getting bifurcation.

that how much is being spent in capital investment and how much in other investments.

So you'll have to check the annual report for this.

The annual report you can get on google. So in this way

I've taken out the annual report of Asian Paints from Google.

This is the annual report of 2017-18.

Here I've opened the cash-flow statement.

We'll come below in it. See cash flow from operating activities,

So we got 2136 crores, so it's matching exactly.

Now see, we got complete bifurcation of cash flow from investing activities

So how much is the capital expenditure here?

Purchase of property plant and equipment, it's around

The company is spending 1350 crores on capital expenditure.

So we'll know that the company is investing in a good place,

it is in the expansion so maybe that cash is worth.

Let's quickly take out the price to free cash flow ratio once.

So here if you take out the price to free cash flow ratio so

So we'll put market capitalization directly in the numerator.

120,494 crores.

After that, we need free cash flow in the numerator.

So I'll quickly calculate free cash flow.

How much is it? 2136 crore is your operating activities cash flow.

From that, what do we deduct? We deduct capital expenditure.

So we'll minus this portion. It is 1358 crores approximately

If we calculate it, it comes to be 778 crores.

We'll put it in the denominator.

So this value will come out as 155.

So see, this price to free cash flow ratio, it's coming out to be very high in this case.

That means the company is doing a lot of expansion.

The money from operating activities, 1350 crore Rs from that,

the company has used in capital expenditure.

Now,

what kind of capital expenditure is being done? That's important.

Does the company need to do this much capital expenditure every year?

Is it renewing? You'll have to further investigate that.

If the money is going into expansion then it's fine.

But if it's going in renewals, then it's wrong.

So you have to see if a company is expanding more?

or does it have to renew its old machinery this much,

that it has this much expense every year.

If the renewals are this much and after that, the price to free cash flow ratio gets this much. Then

the wrong signal comes there and you should not invest in such stocks.

So I'll say, I was only showing you to calculate the price to free cash flow

Now you can do further investigation from this.

If you've enjoyed this video then like it,

and share it with your friends and family members

so they too can get the benefit of this video.

If you have any suggestions or you want to give any feedback

related to this video or channel,

then you can comment below.

In fact, you can also suggest topics for future videos.

I read all of your comments regularly.

So do maximum comments and tell me which other topics should I cover?

And if you still haven't subscribed to this channel,

Then subscribe to this channel and press the bell icon on your phone

because I come with informative finance-related videos like this daily.

So let's meet in the next video.

Till then keep learning, keep earning, and as always, be happy.