7 Low Price-to-Cash-Flow Stocks To Fetch Higher Returns

Investments in stocks made from diligent value analysis is usually considered one of the best practices. In value investing, investors pick stocks that are cheap but fundamentally sound. So the chance of these stocks allowing investors to book profit is high when the market moves higher. Thus, for long-term investors, it is always best to look for the intrinsic value of stocks.

The use of different valuation metrics to determine a stock’s inherent strength is not new in the financial world. But a random selection of a ratio cannot serve your purpose if you want a realistic assessment of a company’s financial position. For this, we would suggest considering Price to Cash Flow (or P/CF) ratio as one of the key metrics. This metric evaluates the market price of a stock relative to the amount of cash flow that the company is generating on a per-share basis – the lower the number, the better.

You must be wondering why we are considering this, when the most widely used valuation metric is Price/Earnings (or P/E). Well, one of the important factors that gives P/CF an upper hand is that operating cash flow adds back non-cash charges such as depreciation and amortization to net income, truly reflecting the financial health of a company.

Analysts caution that a company’s earnings are subject to accounting estimates and management manipulation. On the other hand, cash flow is reliable. It is net cash flow that unveils how much money a company is actually generating and how effectively management is deploying the same.

A positive cash flow indicates an increase in the company’s liquid assets. This gives the company the means to settle debt, shell out for its expenses, reinvest in its business, endure downturns and finally pay back its shareholders. On the other hand, a negative cash flow implies a decline in the company’s liquidity, which in turn lowers its flexibility to support these moves.

However, an investment decision solely based on the P/CF metric may not fetch the desired results. To identify stocks that are trading at a discount, you should expand your search criteria and take into account price-to-book ratio, price-to-earnings ratio and price-to-sales ratio. Adding a favorable Zacks Rank and aValue Score of “A” or “B” to your search criteria should give you even better results as they eliminate the chance of falling into a value trap.

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