Price-to-Cash Flow

The Price to Earnings ratio (or P/E) is probably the most common ratio in determining whether a company is under or overvalued. I would add that a much better measure used on Wall Street is Price-to-Earnings-to-Growth (or PEG. And one must always put more weight on Forward Earnings not Trailing Earnings.

The Price to Cash Flow (or P/CF) is another great ratio. Cash is vital to a company's financial health, especially in tight credit markets, 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.

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.

There were 30 stocks that came thru this week's screen. Here are 5 of them:

BARE - Bare Escentuals, Inc.
CMN - Cantel Medical Corp.
HS - HealthSpring, Inc.
TTC - Toro Company
VIA.B - Viacom Inc.