price-to-cash-flow ratio

The ratio of price to cash flow per share. The price-to-cash-flow ratio is calculated by dividing the current stock price by cash flow per share. Cash flow has traditionally been calculated by adding noncash expenses back to earnings after taxes and subtracting dividend payments. Noncash expenses such as depreciation, depletion and amortization are expenses that appear on the income statement but require no cash outlays. They represent the accountant’s attempt to measure the reduction of the book value of assets as these assets are depleted. While dividends are a discretionary item, they are a real cash outlay that is not tax deductible and is not reflected in earnings. Firms with low price-to-cash-flow ratios may represent neglected firms at attractive prices.