Importance of the price/cash flow ratio (KCV) for investors

The price/cash flow ratio is therefore an essential value for investors, which forms an important basis for decisions. A KCV value can be determined quickly due to the good availability of key figures. In this way, companies can be compared with each other.

Investors can use the figures to differentiate between liquid and illiquid companies, regardless of the level of turnover. In addition, the annual earnings used for the price-earnings ratio (P/E ratio), for example - are only meaningful to a limited extent. Buyers of shares thus avoid bad investments and are able to mathematically identify companies with a profitable core business.

Calculation of the price/cash flow ratio (KCV)

In order to calculate the price-cash flow ratio, it is necessary to determine the cash flow per share. The total sum resulting from the cash flow is divided by the number of freely tradable shares. 

The result of the division is the cash flow per share, which is needed for the further calculation of the KCV value. The cash flow itself can be determined with the data from the cash flow statement if the latter is not known. The cash flow statement is a company's financial flow statement that is published at regular intervals. Listed companies are obliged to publish quarterly reports. As a rule, the cash flow per share does not have to be calculated separately by the investor in exness Asia login personal area because it is already included in the quarterly report. 

Finally, the price-cash flow ratio can be determined mathematically with the data. The operating cash flow is used for the calculation because it allows more precise conclusions to be drawn in order to test a company for its competitiveness. The current share price - which can be viewed on various financial portals - is used for the formula. The quotient from the division of the share price and the operating cash flow per share results in the KCV value. 

KCV calculation example:

A start-up generates annual sales of EUR 450,000 in 2019 and has a cash flow of EUR 250,000. The shares are traded at EUR 40 on the stock exchange, with 100,000 shares in circulation. In the course of the successful year, the management has expanded its activities to other areas, or invested in new projects in the following year.

As a result of further investments in machinery and premises, the company has been able to increase turnover to EUR 744,000 in 2020, so that the share price has risen to EUR 50. Nevertheless, the cash flow - after netting - only amounts to 180,000 EUR and has worsened the company's liquidity, as the following calculation example will show. 

Conclusion: Although the share price has risen, the company has reduced its own earning power through new debts, which could lead to liquidity problems in a crisis.