Using Price-to-Cash Flow to Find Value - Screen of the Week

The Price to Earnings ratio (or P/E) is probably the most common ratio in determining whether a company is under or overvalued.

However, the Price to Cash Flow (or P/CF) is another great ratio to do just that.

Cash of course is vital to a company's financial health, especially nowadays, in order to finance operations, invest in the business, etc.

And cash can't really be manipulated on the Income Statement like earnings can.

The reason why some people like this measurement better than the P/E ratio is that the net income of the Cash Flow portion rightly adds back in depreciation and amortization, since these are not cash expenditures.

Whereas the net income that goes into the Earnings portion of the P/E ratio does not add these in, thus artificially reducing the income and skewing the P/E ratio.

So many analysts prefer using the Price to Cash Flow metric to judge a stock's value.

And just like the P/E ratio is calculated by dividing the Price by its Earnings per share -- the Price to Cash Flow ratio is calculated by dividing the Price by its Cash Flow per share.

Also like a P/E ratio, the lower the number, the better.

Currently, the average Price to Cash Flow (P/CF) for the stocks in the S&P 500 is 9.6. For the 12-month forward P/E ratio, it's 15.3.

But just like the P/E ratio, a value of less than 15 to 20 is generally considered good.

But make sure you compare the stock's P/CF to its Industry, since different Industries will have different numbers that are considered normal.

For example: the average Price/Cash Flow for Gold Mining companies is about 30, whereas it's about 3 for Telecom.

Screen

The screen I'm running today is relatively simple:

• Zacks Rank = 1
  
  (Only Strong Buys get thru.)

  
  

• One Year Projected Growth Rate >= Average for the S&P 500
  
  (Looking for above-market growth rates.)

  
  

• Current Cash Flow >= 5 Year Average Cash Flow
  
  (I want to see the Company's cash position improving.)

  
  

• Price to Cash Flow less than or equal to Median for its Industry
  
  (I want to see Companies with valuations lower than the median for their respective groups.)

There were about 15 stocks that came thru this week's screen. Here are 5 of them:

AAPL Apple Inc.

BWS Brown Shoe Company, Inc.

DW Drew Industries Inc.

MOLX Molex Inc.

PLT Plantronics, Inc.

Start looking for value stocks in new ways with this week's screen. Sign up now for your free trial today and start picking better stocks immediately. And with the backtesting feature, you can test your ideas to see how you can improve your trading in both up markets and down markets. Don't wait for the market to get better before you decide to do better. Start learning how to be a better trader today!

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Disclosure: Performance information for Zacks' portfolios and strategies are available at: http://www.zacks.com/performance.

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