Issue 102, 03 May 2002
Investor's College Cash flows (cont.) Another useful cash flow ratio is the cash flow from operations to net debt ratio.
Using DJs 2001 numbers once again, take the cash flow from operations figure of 52,177 and compare it to the net debt figure of 50,231. This gives a ratio of 1.04, which is very low.
In plain English, this ratio tells you how many years of cash flow it would take the company to pay off its debts, if it had to. It's a good measure of a company's financial health.
To calculate the price-to-cash flow ratio take the current price per share and multiply it by the number of shares on issue. This will give you the 'price' of the whole business. Then divide this figure by the cash flow from operations.
Let's say the price of a DJs share is $1.20 and there are 393.7m shares on issue (see issue 99). That gives a price of $472.4m compared to the cash flow from operations of $52.2m.
That's a price-to-cash flow ratio of 9.5. However, this is not directly comparable to a price-to-earnings ratio (PER) because it doesn't take depreciation (or capital expenditure) into account.
And, before we call it quits, remember our warning from last issue to be careful when using the cash flow from operations figure.
It may or may not contain the interest that the company has paid and received.
C o p y r i g h t Š 2 0 0 6 The Intelligent Investor . Published by The Intelligent Investor Publishing Pty Ltd. ABN 12 108 915 233. Australian Financial Services Number 282288. PO Box 1158, Bondi Junction NSW 1355. Ph: 1800 620 414 Fax: (02) 9387 8674 WARNING This publication is general information only, which means it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether a particular recommendation is appropriate for your needs before acting on it, seeking advice from a financial adviser or stockbroker if necessary. Not all investments are appropriate for all subscribers.
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