Price to Cash Flow Ratio (P/CF) | Formula | Example - YouTube

hello everyone welcome to the channel of WallStreetmojo or watch the video till

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clicking the Bell ican friends today we are going to learn a tutorial on price

to cash flow ratio we are going to learn formula how to calculate this ratio and

we are going to see the examples of the same so let's get into the nitty-gritty

of the same so first and the foremost thing I'm going to show you a graph

basically a chart as you can see over here Chevron's price to earnings ratio

and Chevron's cash flow ratio so the first and foremost thing is that the

currently the p/e ratio Chevron is close enough to in the neighborhood of

149.88 so what do you think about Chevron's valuation at

the very first end it is a definitely a sell however most of the analysts they

have given Chevron's either a strong buy or a buy rating but none of the analysts

has given in a sell rating now are they nuts

why did why did they give by rating to Chevron let me show you something

can you see this trend over here there is a strong buy over here there is a buy

and over here it is hold so no where there is underperform or sell at the

very first end looking at the price earning ratio the call had to be

different the strong dry by-and-by is much more

having their in much probability more so we have to see something something is

here there so of course the analysts are not looking just at price to earnings

ratio they are going beyond those horizons and they are trying to explore

something new that's why there is a difference over here the other multiples

like earning value to BOE ratio your EV/EBITDA price to cash flow ratio

becomes rather more important so let's get into this see from the above graph

the Chevron's a price to cash flow ratio was close enough in the neighborhood of

16.01 X so in this tutorial we'll look at how the price to cash flow

ratio is useful in the valuation at the very first end at the inception let's

try and learn what is price to cash flow ratio see one of the most investment

valuation ratio is P to C ratio price to cash flow ratio many financial experts

considered this ratio as more accurate measure of judging the attractiveness of

an investment then the price to earning ratio so there are very simple reasons

behind it in price to cash flow ratio we consider the cash flow from the operations

which is the exact measure of how much cash came in and how much went out from

the core operations unlike the cash flow earnings can easily be manipulated

because earnings that is the net income okay

get easily affected by depreciation and other cash factors can you see the net

income over here see the depreciation and depletion of motivation expense my

goodness 21,037 it is literally it is evaporating or you can

say the it is boiling down the old net income and you can see the cash

operations cash flow headed by the operational activity is 19,456 so there

are some things which are going wrong right so we note over chevron's here

that cash flow from the operations like depreciation depletion and amortisation

numbers were quite high in 2015 and it was higher than the overall cash flow

from the operations as you can see 19,456 so you can say that though the

price to cash flow ratio you would be able to compare the cash

flow per share with the price tool or with the pressure which will give you an idea

about how much value you will get out of paying the paying the kind of price you

are going to pay so if you want to invest into the company or project price

to cash flow ratio is one of the first one you should consider for computing

now let's understand the formula for price to a cash flow ratio to get the

thorough idea about the price to cash flow ratio we need to look at the two

separate ratio understanding the two separate ratio will help us to figure

out how to compute the price to cash flow ratio let's look at the price to

cash flow ratio first P2 ro CF that is over here I'm writing in short price to

cash flow ratio is equal to price to cash flow ratio is equal to your share

price divided by your share price divided by the cash flow per share okay

this is going to be your formula so the ratio is basically is super useful for

investor as they can understand whether the company is overvalued or undervalued

and however to find out the ratio we need to compute the cash flow per share

so to calculate the cash flow for sure we need two things first we need to know

the operating cash flow that is operating cash flow we just saw over

there and which we will be able to see in the cash flow statement of the

company for that period second we need to know the number of the outstanding

shares so this is the second thing that we need so to calculate the cash flow

for share so the cash flow per share will be I'm the starting cash flow per

share is equal to you will have operating cash flow divided by you will

have to do your number of outstanding outstanding shares so your operating

cash flows formula is this now once we know the cash flow for share we would be

able to compute the price to cash flow ratio very easily easily see let's see

they understand the interpretation interpretation of the same knowing the

formula is not important but interpretation is really important many

inverse get busy in computing price-to-earnings

ratio but if you look at the price to cash flow and price to earnings ratio

sorry price earning ratio you would see that many companies can manipulate it to

attract more investor like for an example if there are many non-cash

factors affecting the net income companies which want to manipulate the

net income can increase or decrease the non-cash factors so the price to

earnings ratio is not always able to provide an accurate picture of the

company or or the of a new investment however when we look at the cash flow it

changes it changes the game completely in cash flow statement the the non-cash

okay then the non-cash factors would be included thus there is no way one would

manipulate the net net cash flow at the end of the period so if we can compute

the operating cash flow that is the which we saw operations that's what I

told you in the very beginning if you see the operating cash flow using the

cash flow statement and divided by number of these shares outstanding

outstanding shares over here and then we'll be able to concentrate the idea

about how much cash flow we can generate per share and then we can compare

these same with the price per share to conclude whether the investment is good

or not so if we try and try to find out the optimal optimal ratio or optimal

level of ratio then we will need to look at the particular sector for

example if we look at the new technological start technology startup

its growth would be much more faster resulting into higher C to F okay and if we

look at the utility company which is operating for decades the price to

complete price to cash flow ratio would be lower for them so in case of text

startup as it growths growth is tremendous the investors would put more

valuation to it than the utility company which has stable cash flow but fewer

opportunities for the growth now let's understand the basic example of the same

so that we get to know how things work out this is a company called G

corporation okay and they have price per share as 10 per Share the cash flow per

share is 4 per share so from the example we can directly compute the

price to cash flow because we have both of things so price per share and price to

cash flow per share we have both the things just divide a by

B we get 2.5 right so at the very first and depending on as you can see depending

on the G sector on which sector G corporation belongs we can compare the P

to CF ratio and find out whether it is good at it its number or or not now

let's understand the second example there is a company called MNC over here

they have given the price per share as 12 per share

they've given the operating shares and the outstanding shares so over here you

need to calculate your denominator so let's see how they have calculated in in

this example we have two things to compute the first we need to compute the

cash flow per share so we have operating cash flow divided by number of share

we'll get cash flow per share and then the price to cash flow per share C the

operating cash flow is 6,00,000 the outstanding share is 5,00,000 so the

cash flow per share is 1.2 per share now the next thing the price per share is 12

per share and we have got the cash flow per share as 1.2 per share so our price

to cash flow is going to be 10 so again the similar thing is applicable in this

regard as well depending on the sector this company belongs to we need to

compare the price to cash flow ratio and find out whether it is good number or

not let's take another example to find out the cash flow ratio now over here we

have been given or information regarding ABC company there is a price per share

that is the market price per share there are number of shares that are

outstanding there is net income over here which is 70,000 okay loss on the

sale of property 2000 decrease in accounts receivable 1000 so over here we

need to form the price or the cash flow statement here increase in the inventory

2000 increase in accrued interest payable 700 account increase in the

accounts payable 1000 deferred taxes 500 and depreciation amortization 3,000 so

over here we need to literally form the cash flow statement from the details at

least it is visible so from the above example the first thing that we have to

compute is the cash flow right so we have the net income that is given to us

70,000 and we will do some adjustment over there so first let's add back some

of the non-cash expenditure light that is

the deferred taxes decrease in the account receivable okay that should be

added increasing the inventories that should be deducted then there is accrued

interest and accounts payable in Sale of property after making the adjustment of

this that is you have basically forming the cash flow statement that is you are

basically forming the net cash flow from the operating activity which gives you

around 76200 of these adjustments you get the net

cash flow from the operating activity as 76200 and

the number of outstanding shares so it would be really be very easier to

compute the cash flow per share now the operating cash flow 76200 the outstanding share is 30000

so your cash flow per share is 2.54 once you get this you have

your price per share that is 12 and your cash flow per share is

2.54 which gives you your price to cash flow as 4.72

so the price to cash flow is 4.72 depending account upon

the sector ABC company belongs to we can compare to find out whether

4.72 is good enough number in regards to price to cash flow or not

now let's see the price to cash flow ratio of Chevron's if you see over

here the net income some of the adjustments that have been made just

like what we did on it in our previous example number 3 in the similar fashion

things have been done over here and you can see the net cash flow provided by

the operating activities which is 19,456 so let's see some details regarding

2013-2014 and 2015 so the very first thing Chevron's price

to cash flow ratio in 2013 was 35000 that is cash flow sorry the

cash flow from the operations as you can see over here is $35,002

million the number of shares in 2013 is 1917 million and the cash flow per

share in 2013 was 18.25 so because we have number of shares detail

we have the cash flow from the operations if you have both the details

we can get the cash flow per share as we know very well so the price to cash

flow will be the price divided by the cash flow that is the price to cash flow

per share so that gives you 6.33X now let's see the data for 2014 so in

the similar fashion things have been calculated right and we have again the

price to cash flow ratio as 6.91 and for the 2015 it is 11. 2 X so what do

you understand over here we note that the P/CF that we

earlier saw for Chevron 16.01X is the trailing 12 months price to cash

flow now let's see some of the oil and gas company who are using this

particular ratio now that we have very fair understanding a very good

understanding after analyzing these formula and some concepts some examples

will compare some of the data for oil oil company like Exxon Chevron BP PCF

ratio so over here all three companies price to cash flow ratio has been

basically taking a really great leap or high it's going up so what do you what

do you have to say about this see the oil and gas P2 price to cash flow

ratio has has been slowed down since 2013 and 2014 oil prices directly affect the

cash flows so due to lower oil prices this company saw a really significant

decline in their ratio in the cash flow from operation so the oil and gas

companies declining cash flow was a great hit to them so with this reduced

cash flow from operation in the recent quarters the price to cash flow ratio

for this companies who are in upward trend are now its I mean higher

the price to cash flow ratio is and is an expense is I mean that means that the

form the expensive the form is so this was some of the leaders regarding the

oil and gas sector can you see this table basically this table is priced to

cash flow ratio of the top oil exploration and production companies and

you can see over here there is a market cap and over here the ratio is there you

can see we here the average price or average price the ratio is

13.83X so is it good or is it bad so the one single answer to this

is that you know some important points over here that we note over here is

average price to cash flow ratio 13.83X the EOG

resources okay over here and pioneer natural EOG resources over here and

there is one more company Pioneer Natural resources they both are two

outliers in the sector with price to cash flow of 26.25

and 20.90 and if we remove the outliers then the average PCF

comes to only 11.36X so after looking at this we should also

look at the downside there are some limitation to the price to cash flow

ratio so there is only one limitation to this ratio it is it is that you know it

also has one loopholes and that is is this that it doesn't take capital

expenditure took account so if you want to know the rigorous measure of this

ratio we need to extend beyond the price to cash flow and we need to calculate

the free cash flow and compare it with the priced per share so the free cash

flow is the amount of the cash flow which is available to the business after

deducting the capital expenditure and computing the free cash flow may sound

complicated but here is the deal all we need to do is that to go back to

income statement of the company and pic net income then we need to add back

depreciation in amortization as they are non-cash charges the next will take into

account any changes in the working capital and thus will get the operating

cash flow now at the very final analysis in the final analysis I can say that it

can be easily we said that price to cash flow ratio is very useful for investor

it gives almost an accurate picture it accurate picture of how good an

investment is and the P to CF is useful because there is a little or no chance

of manipulation in this cash flow if as an investor you would like to invest

into new project or a new startup use this ratio as measuring grid and you can

say that the you can also use 2 you can also use this ratio but the price to

cash flow ratio is is by all means a better measuring grid I hope you have

got a great knowledge about this so that's it for this particular topic if

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