Hot Money Monday: Why you may need to focus on Price/Cashflow ratio to find solid stocks

Price/Cashflow ratio could be a more reliable measure than Price/Earnings ratio
P/CF ratio excludes non-cash items, offering a clearer financial performance measure
Here are ASX stocks with some of the best P/CF ratios

When it comes to assessing a company’s worth, most investors are familiar with the Price Earnings (P/E) ratio.

But there’s another key metric that deserves attention: the Price/Cash Flow (or P/CF) ratio.

Unlike the P/E ratio, which compares a company’s stock price to its earnings per share, the P/CF ratio takes a different approach.

It assesses a company’s value by comparing the share price to its operating cash flow per share.

P/CF Ratio = Market Cap/Cash Flow from Operations

This distinction is important because it focuses on the actual cash generated by a company’s operations rather than its accounting earnings.

One of the key advantages of the P/CF ratio is its exclusion of non-cash elements like depreciation and amortisation.

By removing these factors, which can be subject to manipulation through accounting practices, the P/CF ratio offers a more accurate measure of a company’s true financial performance.

The Price-to-Cash Flow ratio thus provides a clearer insight into a company’s capacity to fulfil financial commitments and pursue growth prospects.

What’s considered a good P/CF ratio?

Generally speaking, a lower P/CF ratio suggests that the company generates strong cash flow relative to its stock price, indicating financial stability.

Depending on the industry, market’s consensus of a good P/CF ratio tends to be any number below 10.

The P/CF ratio can also serve as a valuation metric.

By comparing a company’s market value to its operating cash flow, investors can assess whether a stock is overvalued, undervalued, or fairly priced based on its cash-generating ability.

A lower P/CF ratio may indicate that the stock is undervalued, while a higher ratio may suggest overvaluation.

Furthermore, the P/CF ratio enables comparative analysis.

Investors can use this metric to compare companies within the same sector, helping them identify stocks with more attractive valuations relative to their cash flow performance.

A company’s cash flow from operations can be found in the cash flow statement released to the ASX.

Data on the P/CF ratio meanwhile can be found in places like the trading platform you use, like Commsec etc.

But beware of this

It’s important to approach the P/CF ratio with caution and deeper analysis.

Some industries inherently generate higher cash flows, which may appear to lower the P/CF ratios of companies within those sectors when viewed superficially.

For example, in the utilities sector, companies that provide essential services like water, gas, and electricity tend to enjoy high and steady cash flows.

Similarly, companies in the consumer staples sector, which sell everyday necessities such as food, beverages and personal care items, often experience high cash flows.

Healthcare companies, including pharmaceuticals, medical devices, and healthcare services providers, also tend to generate strong positive cash flows as demand for healthcare remains relatively stable.

Certain segments within the information technology sector, such as software and cloud services, can produce high cash flows, particularly tech companies that offer subscription-based services and software licences.

And in the real estate sector, companies involved in real estate investment trusts (REITs) often generate strong positive cash flows.

ASX stocks and their P/CF ratios

Here are some of the ASX stocks with the best (or low) P/CF ratios.

ASX Large Caps

Code	Name	Price to Cashflow Ratio
WOW	Woolworths	0.08
DBI	Dalrymple Bay	0.08
NCK	Nick Scali	0.08
HVN	Harvey Norman	0.08
IPL	Incitec Pivot	0.08
MFG	Magellan Financial	0.08
APA	APA	0.08
COL	Coles	0.08
CNU	Chorus	0.08
SHL	Sonic Healthcare	0.08
BAP	Bapcor	0.08
BHP	BHP	0.08
EVN	Evolution Mining	0.09
JBH	JB Hi-Fi	0.09
S32	South32	0.09
ORI	Orica	0.09
DXS	Dexus	0.09
VEA	Viva Energy	0.09
MIN	Mineral Resources	0.09
KLS	Kelsian	0.09
RHC	Ramsay Health Care	0.09
RIO	Rio Tinto	0.09
NIC	Nickel Industries	0.09
VNT	Ventia Services	0.10
GOZ	Growthpoint Properties	0.10
RWC	Reliance Worldwide	0.10
MTS	Metcash	0.10
ABC	ADBRI	0.10
DOW	Downer EDI	0.10
RDX	Redox	0.10

ASX Small Caps

Code	Name	Price to Cashflow Ratio
CYL	Catalyst Metals	0.15
CAF	Centrepoint Alliance	0.15
WAT	Waterco	0.16
HGH	Heartland	0.16
EGH	Eureka	0.16
TEA	Tasmea	0.16
SLC	Superloop	0.16
FZR	Fitzroy River	0.16
PEN	Peninsula Energy	0.16
GDI	GDI Property	0.16
SHJ	Shine Justice	0.16
ATA	Atturra	0.16
CWP	Cedar Woods Properties	0.16
IFM	Infomedia	0.16
PPC	Peet	0.16
QIP	QANTM Intellectual Property	0.16
KPG	Kelly Partners	0.17
BIS	Bisalloy Steel	0.17
FID	Fiducian	0.17
SMP	Smartpay	0.17
BBL	Brisbane Broncos	0.17
APZ	Aspen	0.17
FSF	Fonterra Shareholders' Fund	0.17
SPZ	Smart Parking	0.18
EGL	The Environmental	0.18
HCW	HealthCo Healthcare and Wellness REIT	0.18
AIM	Ai-Media Technologies	0.18
EOL	Energy One	0.19
SW1	Swift Networks	0.19
PH2	Pure Hydrogen	0.19