What does price to cash ratio tell you?
The price-to-cash flow ratio (P/CF) is a valuation method that measures how much cash a company is generating relative to its stock price. A high P/CF ratio is generally seen as worse, while a low P/CF ratio is more desirable.
A good price-to-cash-flow ratio is any number below 10. Lower ratios show that a stock is undervalued when compared to its cash flows, meaning there is a better value in the stock.
What is a good price to cash flow ratio? A good price to cash flow ratio is anything below 10. The lower the number, the better the value of the stock.
Is It Better to Have a High or Low Cash Ratio? It's often better to have a high cash ratio. A company has more cash on hand, lower short-term liabilities, or a combination of the two. It also means a company will have a greater ability to pay off current debts as they come due.
What Does the Price-to-Cash Flow (P/CF) Ratio Tell You? The P/CF ratio measures how much cash a company generates relative to its stock price, rather than what it records in earnings relative to its stock price, as measured by the price-earnings (P/E) ratio.
A low cash ratio means that the amount of short-term liabilities a business has is either similar to or higher than the number of assets it has to pay off those liabilities. So the business is less likely to be able to pay off short-term loans.
Interpretation of the Cash Ratio
Although there is no ideal figure, a ratio of not lower than 0.5 to 1 is usually preferred. The cash ratio figure provides the most conservative insight into a company's liquidity since only cash and cash equivalents are taken into consideration.
To have a healthy free cash flow, you want to have enough free cash on hand to be able to pay all of your company's bills and costs for a month, and the more you surpass that number, the better. Some investors and analysts believe that a good free cash flow for a SaaS company is anywhere from about 20% to 25%.
Hence, Apple's Price-to-Free-Cash-Flow Ratio for today is 32.85. During the past 13 years, Apple's highest Price-to-Free-Cash-Flow Ratio was 34.28. The lowest was 8.55. And the median was 17.28.
The justified cash flow ratio represents the 'fair' value based on a company's fundamentals. If the current ratio deviates significantly from the justified ratio, it might indicate overvaluation or undervaluation, guiding investors on potential investment decisions.
What is the ideal cash ratio?
There is no ideal figure, but a cash ratio is considered good if it is between 0.5 and 1. For example, a company with $200,000 in cash and cash equivalents, and $150,000 in liabilities, will have a 1.33 cash ratio.
Higher Cash Ratios indicate less credit and liquidity risk, but if a company's ratio is too high, it could indicate mismanagement or misallocated capital. As with the other Liquidity Ratios, context is king for understanding the Cash Ratio.
Still, as a general rule of thumb, most companies aim for an equity ratio of around 50%. Companies with ratios ranging around 50% to 80% tend to be considered “conservative”, while those with ratios between 20% and 40% are considered “leveraged”.
Disadvantages of P/CF
Always review all financial statements and income statements to set appropriate investor expectations. It can be influenced by short-term factors like random market movements. These include changes in operating cash flow. Not a good indicator of future growth prospects or future cash flows.
Retail businesses: 1.5 to 3.0 (i.e., cash flow x 1.5-3.0 multiple) Service businesses: 1.5 to 3.0 (i.e., cash flow x 1.5-3.0 multiple) Food businesses: 1.5 to 3.0 (i.e., cash flow x 1.5-3.0 multiple) Manufacturing businesses: 3.0 to 5.0+ (i.e., cash flow x 3.0-5.0+ multiple)
Operating cash flow ratio
This ratio calculates how much cash a business makes from its sales. A preferred operating cash flow number is greater than one because it means a business is doing well and the company has enough money to operate.
Some real estate investors are happy with a safe and predictable CoC return of 7% – 10%, while others will only consider a property with a cash-on-cash return of at least 15%.
If your debt ratio does not exceed 30%, the banks will find it excellent. Your ratio shows that if you manage your daily expenses well, you should be able to pay off your debts without worry or penalty. A debt ratio between 30% and 36% is also considered good.
Common Size Analysis, also known as Vertical Analysis, is a method of financial statement analysis that compares all items on the statement against one pre-determined item that acts as a base against which to evaluate all others. The formula for calculating this ratio is (Comparison Amount/Base Amount) * 100.
A cash ratio of 0.2 suggests that a company has 20% of its current liabilities covered by cash and cash equivalents. While this may not be considered high, the adequacy of the ratio depends on various factors such as industry norms, business model, and specific circ*mstances of the company.
What does a low cash ratio indicate?
There are no specific numbers to determine an ideal cash ratio. It depends on the nature of your business. However, lenders prefer a cash ratio that ranges from 0.5 to 1. A cash ratio below 0.5 means your business has equal to or twice the short-term liabilities compared to cash and is considered risky.
Do not subtract other amounts that may be withheld or automatically deducted, like health insurance or retirement contributions. Those will become part of your budget. The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.
Free Cash Flow Yield determines if the stock price provides good value for the amount of free cash flow being generated. In general, especially when researching dividend stocks, yields above 4% would be acceptable for further research. Yields above 7% would be considered of high rank.
The result must be placed in context to make the free cash flow-to-sales ratio meaningful. Generally, a ratio higher than five percent is preferable. Essentially, this indicates a company's robust ability to pull in enough cash to keep growing. This will also serve the company well when trying to please shareholders.
Following the 10% rule is another way to calculate the rate of average cash flow. Divide the yearly net cash flow by the amount of money that was invested in the property. If the result is over 10%. Then this is a sign of positive and a good amount of average cash flow".
