Chicago, IL – August 24, 2010 - Stocks in this week's article include Alliance Resource Partners, L.P. ARLP, Drew Industries Inc. DW, JDS Uniphase Corporation JDSU, Solarfun Power Holdings Co. Ltd. SOLF and Tennant Co. TNC. Kevin Matras shows how to search for stocks with increasing Cash Flows, but low Price to Cash Flow ratios.
Screen of the Week written by Kevin Matras of Zacks Investment Research:
The Price to Earnings ratio (or P/E) is probably the most common ratio in determining whether a company is under or overvalued. However, the Price to Cash Flow (or P/CF) is another great ratio to do just that.
Cash of course is vital to a company's financial health, especially nowadays. And cash can't really be manipulated on the Income Statement like earnings can.
The reason why some people like this measurement better than the P/E ratio is that the net income of the Cash Flow portion rightly adds back in depreciation and amortization, since these are not cash expenditures. Whereas the net income that goes into the Earnings portion of the P/E ratio does not add these in, thus artificially reducing the income and skewing the P/E ratio.
So many analysts prefer using the Price to Cash Flow metric to judge a stock's value.
And just like the P/E ratio is calculated by dividing the Price by its Earnings per share -- the Price to Cash Flow ratio is calculated by dividing the Price by its Cash Flow per share. Also like a P/E ratio, the lower the number, the better. Just like the P/E ratio, a value of less than 15 to 20 is generally considered good.
And make sure you compare the stock's P/CF to its Industry, since different Industries will have different numbers that are considered normal.
The screen I'm running today is relatively simple...
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ALLIANCE RES (ARLP): Free Stock Analysis Report
DREW INDS INC (DW): Free Stock Analysis Report
JDS UNIPHASE CP (JDSU): Free Stock Analysis Report
SOLARFUN POWER (SOLF): Free Stock Analysis Report
TENNANT CO (TNC): Free Stock Analysis Report
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