Price-cash-flow ratio
The price-cash-flow ratio ( KCV or KCF ) is a term from financial analysis . It is a liquidity- oriented share ratio that indicates the ratio of share price to cash flow per share . Additional information is required as to what type of cash flow (e.g. gross cash flow, operating cash flow or free cash flow) is meant.
application
The KCV can be used in addition to or instead of the price / earnings ratio . The lower its KCV, the cheaper a share is.
Advantages of KCV over KGV
The KCV is also applicable if the KGV does not provide any meaningful information due to a loss report .
The KCV is less susceptible to accounting manipulation , as the cash flow is not influenced by accounting policy measures such as the creation and release of hidden reserves or changes in payment periods.
For companies that determine their profit according to different accounting rules , the KCV can provide better comparability than the KGV.
The last two arguments are now becoming less important as IFRS spread and improve .
Disadvantages KCV compared to KGV
The cash flow is subject to much stronger fluctuations than the profit due to investment cycles and due date considerations of the current assets . It is therefore not suitable for evaluating the result of a single financial year , but has to be considered and averaged over several years.
In growing or shrinking companies, the free cash flow is distorted by the unequal ratio of investments and depreciation . If one optionally considers the operative cash flow before investments, one ignores the ongoing expenditure for replacement and maintenance investments.
Different ways of calculating the cash flow make comparability difficult. Depending on the variant, taxes and interest can be included in the cash flow statement at different points .
Pitfalls
Estimating future cash flows, as well as future profits, is a demanding task; see also discounted cash flow . Past cash flows cannot simply be extrapolated into the future. Changes in investment activity can have an impact, as can economic cycles, changed competition and other economic and business factors.