The Market Multiples are variables which provide important information on businesses. These indicators are used, for this reason, both in the assessment of the value of the companies and for comparison of such companies. One of the main market multiples is the Price to Cash Flow. In this guide, therefore, we’ll see how to do to be able to correctly calculate the multiple “Price to Cash Flow.”
The Price to Cash Flow, usually indicated with the letters “P / CF”, is a multiple of the market that is part of the category “Multiples based on the Market Price”. It is used when assessing a company, applying the “Method of Comparable Companies”. This indicator is made up of a relationship that has the stock’s market price of the company for the numerator and the Cash Flow (per share) for the denominator.
This multiple is, in contrast to others, based on the cash flow of the company. The focus is then placed on the financial side rather than on the profitability (as in other multiple widely used such as the Price Earnings). It is used when the company has such very significant depreciation or impairment generating provisions. By implementing the Cash Flow the analysts attempt to eliminate those disadvantages caused by profitability overview of the company when fiscal policies tend to have significant influence on the income statement.
Now let’s see how to calculate the multiplier with a practical example. The market price of a share of a company is $20, the last year the cash flow generated from this amounted to $200,000 the number of shares in circulation is 100,000.
First we determine the value of the cash flow per share, then divide the total cash flow ($200,000) for the number of shares (100,000) obtaining a cash flow per share of $2. The value of the multiple is the ratio $20 / $2, or 10. The cash flow per share of the company then pays the price action in 10 years.
So by following a few simple steps in this guide, we will know how to finally be able to correctly calculate the multiple “Price to Cash Flow.” For those who are beginners to the world of finance, will find the above steps slightly complicated, but with a little patience and, possibly, after several attempts, you will eventually adapt perfectly to this particular calculation.
How to create a cash flow from financial statements
The cash flow means the difference between revenue and cash outflows of a certain period of operation. It is the difference between revenue and expenditures financial during a given period of financial year of our company. It can also be built from the data of the financial statements, but it is useful to be able to make estimates and prospects regarding the evolution of the balance sheet of the company and of the profit or loss. Let us see how to create a cash flow from a budget.
At this point we should not insert between receipts of the company the amount of the items listed in the previous step. Let’s take an example, if we have one of the items “sale of goods” for an amount of $200, just type in the cash flow “receipts from the sale of goods” $200. This is also true for purchases, we also do this for a quick example and see what was spent on the purchase of raw materials for $300. So just write in the cash flow “Payment for purchase of raw materials” $300. Warning: not all income statement items of the companies can be included in this table.
All entries that do not generate revenue for our company or outputs capital, should not be transcribed in the cash flow, and instead included exclusively in the balance sheet. One of these items could be the provision for severance pay or termination of work.
But we must be very careful about all the delays of payments of receipts exploited by the company. Let’s take another practical example, suppose we know that our company will cash $100 in 180 days. When we count the cash flow, we must take this into account, therefore these receipts will be representative of only a part of the year in question. The count to be made, taking into account that we will receive revenue precisely in 180 days for the sale of goods for $100, will be as follows: 100 * 180/360 and the result will be about $50.
How to calculate the operating cash flow
Further on, we will see how to calculate the operating cash flow, which is the value that refers to the amount of money a company generates from its operations in a certain amount of time, set as a benchmark. This is not simple, so follow each step carefully.
You must collect all the documents proving cash transactions for a specified period of time, where cash entering and leaving the business is registered. We will calculate the total amount of cash during the period defined by adding the values of certain parameters: these include revenues, interests and claims paid. You must include the cash or the equivalent, as bank transfers and checks.
Operating cash flow, most commonly referred to as cash flow, is calculated by the following equation: EBIT (earnings-free interest and taxes) + Depreciation – Taxes. EBIT (known as operating income). This last information can easily be found by consulting the company’s annual report.
Let’s take a practical example that will illustrate the ideas we take as a sample annual report to Microsoft in 2007 (values are rounded down, in order to facilitate the calculation). The company reported EBIT of $20 million, an amortization of $16 million, and paid taxes for $7 million.
We will have a following equation: 20 + 16-7 = 29.
Operating cash flow for 2007 Microsoft was thus $29 million.
This indicator is extremely important, as it is a solid measure of profits of a company. However, referring to real money and being obtainable by operations, it is difficult to manipulate.
Its informative power is very strong: you will be immediately aware if an activity is burning more money than is actually earning. If you do not have time to check every financial detail, operating cash flow is a snapshot of how the company in question is proceeding. A positive cash flow is a good sign, while negative indices will need an adequate explanation; this could result from a bad investment or an unnecessary expense. Recordings of a cash flow in default for more years, or continuing to fall, are warning signs because they immediately put in place the necessary measures for solutions or at least compensation.
The most important indicators of a company asset
If we are the owners of a company, small or large, we have to keep in mind our capital ratios. To keep them in mind, however, we must know what they are and, and more importantly, know the various types of them. The indices are data that are constructed to assess the situation on the balance sheet and the cash flows of a company. These indices, also called financial ratios, can be divided into three categories: index sheet, profitability and liquidity. In turn, the index sheet can be of different types, among which the most important are those for structure analysis, financial autonomy and coverage.
Among the indices for analysis of the structure there distinguish:
- Rigidity of the investments, i.e. the ratio of fixed assets to total investments, which is calculated by dividing total current assets to total investments and multiplying the result by one hundred-elasticity of investment, i.e. the ratio of current assets to total assets (current assets : total assets)
- Rigidity of sources of capital, which represent the degree of coverage of financial activities with equity and long-term debt. The higher this value, the lower the risk of the company not to address short-period debt.
- Elasticity of capital sources, complementary to the rigidity of capital, indicates the increased risk of the company to face short-term debts.
The index of financial autonomy instead connects its capital by means of third parties, or rather Means of third parties / Equity. With this index we can evaluate if our company is independent or whether it depends too much to outside investment to it: if the index is equal to 0, there is an absence of debt, from 0 to 0.50 a level conducive to development, from 0.50 to 0.80 a situation of equilibrium, between 0.80 and 2.0 a controllable debt situation. Finally, if the index is equal to or greater than 2.0 there is an acclaimed imbalance.
This formula can also be used to control the ratio to the capital invested, replacing the latter to equity. Last, but not least, we find the coverage, through which we can understand how the company manages to cover just using its own means.
How to calculate the index of elasticity global company
The ratio analysis of financial statements is to calculate, through the use of the data contained in the balance sheet and income statement, the quotients (said just indexes) ranging in compare sets of values of different nature and often are expressed as a percentage.
These ratios are then grouped, based on the appearance of the company that you want to analyze in:
- Profitability ratios
- Productivity ratios
- Capital ratios and financial indices.
By reading on you will understand better how to calculate the index of elasticity of the global company.
The index of elasticity is one of those indices used to make the analysis of a company asset. In particular, the analysis sheet goes to study the structure of the assets, ensuring the equilibrium conditions in the composition of jobs and sources of funding. Among the various capital ratios, we find the overall elasticity index.
The calculation of elasticity index global company making the dividend for current assets vs fixed assets. In other words, the global index of elasticity is used to calculate the capacity that the company has to reconvert the actives invested in cash. The indices of stiffness and elasticity of the assets then can be used to study the composition of loans and therefore are closely related to the interpretation of the structure of banks and treasury.
Generally, a company that has a higher degree of elasticity allows greater flexibility in production and thus a higher ability to adapt to changing market conditions. However, the judgment on the composition of loans must be made bearing in mind in which sector the company operates.
For example, an industrial company tends to present, by and large, a higher degree of rigidity in lending compared to a commercial company. In fact an industrial company must perform a physical-technical transformation process from raw materials and therefore needs investment in fixed assets; a commercial enterprise can maintain a higher degree of flexibility, because the production process that unfolds is directed at increasing the utility of goods purchased for later resale.
So, in order to better evaluate the elasticity index global company and its relative balance sheet, check the correlation time, the deadlines, including the uses and sources of funding as it is imperative that the durables are financed with permanent capital or at most with debt capital in the medium to long term.