Back to top

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 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 like this measurement better than the P/E ratio is because the net income of the Cash Flow portion rightly adds depreciation and amortization back in, 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 14.05.

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

In my testing I have found that a P/CF between 0-10 produced the best results (17.1% over the last 10 years (using a 1-week rebalancing period). The second best results came with the range of 10-20 with a 10.2% gain. However, once you get over 30, the odds point to a loss (-2.8%). And over 40, the odds of loss are even greater at -6.9%.



By the way, if you add the Zacks Rank to that first range, the results increase to 34.7%. Pretty awesome.



This being said though, I still also like comparing the stocks' P/CF to its Industry, as different Industries will have different numbers that are considered normal.

For example: for Computer-Software companies, the average Price/Cash Flow is about 19.2, whereas for Telecom it's about 6.0.


Screen

The screen I'm running today is relatively simple:

Zacks Rank equals 1
(Only Strong Buys get thru.)

One Year Projected Growth Rate greater than or equal to Average for the S&P 500
(Looking for above market growth rates.)

Current Cash Flow greater than or equal to 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
(Want to see companies with valuations lower than the median for their respective groups.)

Here are 5 stocks that came thru this week's screen:

(CTB - Analyst Report) Cooper Tire
(ERF - Snapshot Report) Enerplus Corp.
(SYA - Snapshot Report) Symetra Financial
(CMO - Snapshot Report) Capstead Mortgage
(MAN - Analyst Report) ManpowerGroup

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! You can do it.

Click here to sign up for a free trial to the Research Wizard today.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

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

Please login to Zacks.com or register to post a comment.

New to Zacks?

Start Here

Zacks Investment Research

Close

Are you a new Zacks Member or a visitor to Zacks.com?

Top Zacks Features

My Portfolio Tracker

Is it Time to Sell?

One of the most important steps you can take today is to set up your portfolio tracker on Zacks.com. Once you do, you'll be notified of major events affecting your stocks and/or funds with daily email alerts.

More Zacks Resources

Zacks Rank Home - Evaluate your stocks and use the Zacks Rank to eliminate the losers and keep the winners.

Mutual Fund Rank Home - Evaluate your funds with the Mutual Fund Rank for both your personal and retirement funds.

Stock/Mutual Fund Screening - Find better stocks and mutual funds. The ones most likely to beat the market and provide a positive return.

My Portfolio - Track your Portfolio and find out where your stocks/mutual funds stack up with the Zacks Rank.

Zacks #1 Rank Top Movers for Zacks #1 Rank Top Movers

Company Symbol Price %Chg
PLANAR SYST… PLNR 4.44 +5.21%
BITAUTO HOL… BITA 81.71 +5.12%
CTPARTNERS… CTP 16.66 +4.26%
CHINA BIOLO… CBPO 47.91 +3.30%
MALLINCKROD… MNK 72.94 +2.85%