P/CF – Price / Cash flow

P / E is based on net profit, but the income statement often deviates from the cash flow.

For example, depreciation is an expense in the accounts, but because it is an expense without a cash outlay, depreciation is removed from the cash flow analysis.

In addition, there are several accounting items that allow for discretion, such as the valuation of inventories, the year in which income is to be booked, and how long the assets are to be depreciated.

This is often done differently, even though the listed companies follow international accounting standards. In order to calculate cash flow per share, the starting point is the accounting profit, but the elements that do not contain a physical outlay of cash are removed.

In the accounts, you will find both a profit and loss account and a separate cash flow account.

Ultimately, it is the cash flow that pays the costs. Let’s, therefore, look more at P / CF:

P stands for price and CF stands for cash flow. The share price is divided into free cash flow per share.

In the long run, there will usually be a connection between these two accounts, but even over long periods, there can be a big difference.

Alpha Architect examined the return for P / CF by choosing the 50 stocks with the lowest ratio in the S&P 500. The portfolio was rebalanced each year, and from 2000 to 2017 the annual return was 14.8%, which was much better than the 9% return that S&P 500 delivered annually.