The cash flow ratio is the little sister of the P/E ratio. It’s the second way to calculate the market to see how a company is performing.
We’ve heard the saying ‘money makes the world go around’. And that’s certainly true. Many investors prefer to use this ratio because it looks at cash flow instead of net income. This means an investor can calculate how much physical money is flowing through the company. For example, you may prefer to track the individual fish swimming downstream, than to guess how many fish are in the tank (even if the tank is large, expensive and shiny!).
Tips and tricks
Thankfully, you don’t have to do all these cash flow ratio calculations yourself. Many websites do it for you: Reuters.com.