Price/cash flow ratio
The price to cash flow ratio ( KCV or KCF ) is a term used in financial analysis. It is a liquidity-oriented equity ratio that reflects the ratio of stock price to cash flow per share. Whereas an additional indication what kind of cash flow ( for example, gross cash flow, operating cash flow or free cash flow ) is meant.
Application
The KCV can be used in addition to or in place of the price-earnings ratio. Here, a share shall be deemed the more cheaper, the lower is their KCV.
KCV advantages over KGV
The KCV is also applicable when the PER due to a loss recognized yields no useful information.
The KCV is less susceptible to accounting technical manipulations, because the cash flow is not affected by accounting policy measures such as the establishment and liquidation of hidden reserves or alteration of payment periods.
For companies determine their profit according to different accounting rules, the KCV may provide a better comparison than the PER.
The last two arguments lose now with the increasing spread and improvement of IFRS in importance.
KCV disadvantages compared to KGV
The cash flow is due to investment cycles and date of observations of current assets much greater fluctuations than the profit. It is therefore not suitable to evaluate the result of a single financial year, but must be considered and averaged over several years.
With growing or shrinking business of free cash flow is distorted by the unequal ratio of investment and depreciation. Looking at either the operating cash flow before investments, as you leave behind the ongoing cost of replacement and maintenance investments.
Different ways to calculate the cash flow, which affects the comparability. So taxes and interest may be included in the cash flow statement depending on the variant in different places.
Pitfalls
The estimation of future cash flows, as well as future profits, is a challenging task; See also discounted cash flow. Past cash flows can not be updated easily in the future. Changes in the investment activities can impact as well as economic cycles, changes in competition and other ethnic and economic factors.