Chartered Financial Analyst (CFA) Level 1 Practice Exam

What does the Price to Cash Flow (PC/F) ratio indicate?

1. Price per share / Cash flow per share

2. Price per share / Earnings per share

3. Price per share / Net income

4. Cash flow per share / Book value per share

The correct answer is: Price per share / Cash flow per share

The Price to Cash Flow (PC/F) ratio is a valuation measure that reflects how much investors are willing to pay for each dollar of cash flow generated by a company. It is calculated by taking the price per share and dividing it by the cash flow per share. This ratio is particularly useful for assessing the value of companies where earnings may be less reliable due to factors like non-cash charges, accounting practices, or cyclical business models. Investors often prefer the PC/F ratio because cash flow is a more stable measure than earnings. Cash flow can provide a clearer picture of a company's capacity to generate cash, which is critical for operations, debt servicing, and dividends. In the context of the other choices, the Price per share / Earnings per share refers to the Price to Earnings (P/E) ratio, which measures how much investors are willing to pay for each dollar of earnings, and can be influenced by non-cash items. Price per share / Net income also offers similar insights but is less specific than the P/E ratio in a cash flow context. Finally, Cash flow per share / Book value per share does not relate to the standard definition of the Price to Cash Flow ratio, since it does not involve the price per share in its