What is Price-to-cash flow ratio? How useful is this ratio?

 

MARKET RATIO:Price-to-cash flows-ratio

MARKET RATIO:Price-to-cash flows-ratio

One of the business ratio analysis which we often come across is the Price-to-cash flow ratio.

Append below in summary what is this market ratio is all about:-

RatioPurposeFormula
Price-to-cash flow ratio
  • To measure whether a company’s share price is high or low in the context of its cash flow.
  • Useful as it indicates the company’s market value plus enabling competitor analysis among companies.
  • Important as this ratio can also indicate the future financial health of a company
 Price-to-cash flow ratio =Share price/Cash flow per share{Cash flow per share =  (Operating cash flow-preferred dividend)/Number of common shares outstanding

Simple illustration:

ABC Ltd has share price as $20 per share and its cash flow per per share is $10.ABC Ltd’s price-to-cash flow ratio =20/10=2Its indicates how much an investor will paid for its $1 of cash flow generated by the company i.e. $2 in stock.

Interpretation:

  • The lower the price-to-cash flow ratio means the more the company may be undervalued which poses good opportunity for investment.

Salient points to note:

  • This business ratio is useful as it does not need to go through the process of using net income less depreciation and amortization charge
  • The disadvantages is that cash flow is not static and different industries are associate with different price-to-cash flow level
  • Note that to be comparable the price-to-cash flow ratio should be used in companies which sells similar products and services
  • A related ratio is the price-to-free cash flow which is cash that is available to benefit the shareholders and after deducting capital expenditures from operating cash flow. This price-to-free cash flow ratio shows how much investors must pay for each $1 of free cash flow)

What is Price-to-sales ratio? How useful is this market ratio?

Market ratio:Price-to-sales-ratio

Market ratio:Price-to-sales-ratio

 One of the business ratio analysis which we often come across is the Price-to-sales ratio.

Append below in summary what is this market ratio is all about:-

RatioPurposeFormula
Price-to-sales ratio
  • Measures the relationship between the value of stock and the level of company.   PS:note that sales volume is an operating activity of a company
 Price-to-sales =Current share price/ Revenue per shareOrPrice-to-sales =Market Capitalization/Annual revenue

Simple illustration:

ABC Ltd has:-Its current share price is $20 and the revenue per share is $10.ABC Ltd’s price-to-sales ratio =20/10=2-

Interpretation:

  • Generally,a low Price-to-sales ratio indicates that a company has better value. In another word,if a company’s price-to-sales ratio is high,the investor is paying more for the company’s sale than if the business market ratio is low.

Salient points to note:

  • This business ratio is ideal for computing the value of a company with no earnings history.In the past,this ratio being frequently used for internet based companies which has no or low earnings records as earning per share,etc cannot be used effectively.
  • The underlying assumption of this price-to-sales ratio is that profits will be made once market share is established.
  • A few considered this as a good business ratio as sales statistics are difficult to manipulate. Unfortunately,nowadays,we also see many public listed companies manipulating their sales figures as the sales figure also form one part of the key performance metric/KPA/KPI.

What is Price-to-book ratio? How Useful is this ratio?

MARKET RATIO:Price-to-book ratio

MARKET RATIO:Price-to-book ratio

One of the business ratio analysis which we often come across is the Price-to-book ratio.

Append below in summary what is this market ratio is all about:-

RatioPurposeFormula
Price-to-book ratio (P/B ratio)
  • Measures the value that the stock market places on a company relative to its book value.
  • Also known as price-equity ratio
  • Frequently used by investors to find undervalued companies
Price-to-book =Current share price/ Book value per share{Note:(a)     Book value= total assets-( liabilities + intangible assets)(b)     Book value per share=Book value/ No of common shares outstanding }

Simple illustration:

ABC Ltd has:-Total assets of $100,000:Liabilities &Intangible assets of $50,000. There are currently 10,000 ABC Ltd’s shares outstanding and the market price for one share is $2.00ABC Ltd’s book value per share=($100,000-$50,000)/10,000=$5P/B ratio of ABC Ltd =5.00/2.00=2.5

Interpretation:

  • Generally,a high P/B indicate that a company is overvalued and a low P/B ratio an undervalued company.

Salient points to note:

  • This business ratio is relatively simplistic
  • High P/B might not mean overvalue as the public might view the company’s future are good and earning potential is high
  • Also,in bull market,normally high P/B but during bear markets P/B be similar re:nearer to 1
  • Also be aware that some consumer and service orientated companies have negative P/B ratio because they have relatively more liabilities than assets
  • This ratio cannot be used singly and should analyzed together with other financial measurements like return on equity,etc and also cash flow and volatility of earnings must be considered too.

 

What Is Meant by Asset-based Finance? What Are some of the differences between Asset-based finance and Cash Flow-based Loans/FinanceWhat Is Meant by Asset-based Finance? What Are some of the differences between Asset-based finance and Cash Flow-based Loans/Finance

Both asset based finance and cash flow finance are important sources of funding for a business for its short term(working capital) and long term(capital assets) sustainability.

Asset-based finance is a source of funding that is secured by a company’s assets.

This article looks at what is asset based finance and see the difference between the more traditional source of finance namely cash flow loan or finance.

Asset based finance:Accounts Receivables,Inventory,etc

Asset based finance:Accounts Receivables,Inventory,etc

Some features of asset-based finance include: