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Finance Dictionary and Glossary of Investment Terms
Price/Cash Flow Ratio
The closing price divided by cash flow per share from the last 12 months. An alternative to the P/E ratio, this one removes depreciation and other non-cash charges from the equation, and can be especially useful in businesses with huge depreciation expenses, such as the cable TV industry. Price/cash flow is also often used to analyze companies in cyclical industries such as automobiles, steel and paper. Like the P/E ratio, Price/Cash Flow should not be considered in a vacuum, but rather in comparison with similar companies.Another advantage of Price/Cash flow is that it makes it easier to analyze various companies across borders. Depreciation and other issues are treated in different ways under different national accounting rules, making earnings-based ratios problematic. Looking at cash flow can help eliminate such problems and make comparisons more meaningful.