The cash flow of a company reflects the actual cash flows over a certain period of time. Compared to the KGV, the KCV is less susceptible to measures of the balance cosmetics. The KCV thus provides information about how the price of a company is related to its liquidity. The price / cash flow ratio can therefore be used to assess the performance of a stock corporation. On average across a broad stock market, KCV values between 15 and 18 are considered fair. Low values are considered good.
Finanzoo.de calculates the score based on the "free cash flow" per share in relation to the current market price of the share. Points are deducted for longer periods with negative free cash flows.
Cash flow focuses solely on cash flows. An investor's overarching goal may be, for example, high cash inflows at low stock prices. Profitability ratios are unimportant.
Investors consider a lower value advantageous. A low price-to-cash-flow ratio can occur when a company's cash flow is very high compared to its profit. For example, if a company's operating cash flow is €1 million with a market value of €10 million, the P/CF ratio is 10. If the stock price increases, so does the P/CF ratio. The same effect would occur if the cash flow decreases. On the other hand, the P/CF ratio decreases when stock prices fall or cash flows increase.
Investors can also gain insights from the fact that only a company's actual cash flows can be included in the ratio. Thus, they can evaluate how much cash a company generates compared to its market value. A company with a P/CF of 5, for example, generates a cash flow of 20 cents for every euro of market value.
The following table provides an overview of how the price-to-cash-flow ratio reacts to changes in stock price or cash flow.