Here is another metric that can help you determine the value of a company: Price-to-Cash-Flow Ratio.
The price-to-cash-flow ratio is the ratio of a stock’s price to its cash flow per share. The price-to-cash-flow ratio is an indicator of a stock’s valuation. Although there is no single figure to indicate an optimal price-to-cash-flow ratio, a ratio in the low single digits may indicate the stock is undervalued, while a higher ratio may suggest potential overvaluation.
The ratio takes into consideration a stock’s operating cash flow, which adds non-cash earnings such as depreciation and amortization to net income. It is especially useful for valuing stocks that have positive cash flow but are not profitable because of large non-cash charges.
Calculated as:
Price-To-Cash-Flow Ratio = Share Price/Cash Flow Per Share
For Example:
Both companies are in the Travel industry. Which stock is more undervalued or overvalued?
Priceline Group (PCLN) with a Price-to-Cash-Flow of $24.36 per share or
Expedia (EXPE) with a Price-to-Cash-Flow of $32.84 per share
You may leave your answer in the comments section below.
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