KCV

If you want to get an overview of the valuation of shares as an investor, it is essential to take a look at classic valuation ratios. One of these is the Kurs-Cashflow-Verhältnis, short KCV. This is particularly useful for avoiding a distorted valuation of shares due to balance sheet effects. In this article, you will find out what this ratio is, how it is calculated and how you can use it in your investment strategy.

What is the price/cash flow ratio?

The KCV describes the relationship between the Share price of a company and the operating cash flow per share. There are, how much money investors are willing to payto receive 1 euro in operating cash inflow.

In contrast to the KGV (price/earnings ratio), which is based on the accounting profit, the KCV is based on the actual profit. Cash inflow from operating activities. It therefore considers the money available to the company to make investments, repay debts or pay dividends.

This makes the KCV a solid valuation ratioespecially if the profit is distorted by depreciation, tax effects or one-off factors.

How is the KCV calculated?

The formula is simple:

KCV = (share price) / (operating cash flow per share)

The Operating cash flow can be found in the cash flow statement. To obtain the value per share, the total value of the cash flow is divided by the number of shares outstanding.

To calculate the key figure, divide the current share price through the operating cash flow per share. This can be found in the cash flow statement under "Cash flow from operating activities". To determine its value per share, the company's total operating cash flow is divided by the number of shares outstanding.

Example:

• Share price: € 50
• Operating cash flow per share: € 10

KCV = (50/10) = 5

This means that investors are currently paying € 5 for € 1 operating cash flow per share.

What does the KCV say?

The quotient serves as Indicator for the valuation of a share in relation to cash flow generation. It helps investors to assess, whether a share is rather cheap or expensivein relation to the real cash inflow generated by the company.

• Low value (e.g. below 10) → The share is considered favorably valued. Investors pay little for every euro of operating cash flow.
• High value (e.g. over 15-20) → The share is expensive in relation to the cash flow. Increased caution may be appropriate here.

Why is cash flow so important?

While the profit in the balance sheet accounting manipulation or can be strongly influenced by one-off effects, the operating cash flow is a robust indicator of a company's financial health. It shows how much capital really flows into the company and how much of it is directly available.

A stable or growing flow means:

• The company has Sufficient fundsto cover its running costs,
• can Repay debts or Distribute dividendsand
• is in times of crisis less susceptibleas it is not dependent on external funding.

The KCV can therefore provide valuable insight, particularly in times of economic sensitivity, how solidly a company is positionedregardless of the reported profit.

Why is the KCV relevant for investors?

The key figure offers valuable insights into company valuation, particularly for long-term investors:

1. lower susceptibility to accounting distortions

In contrast to profit, operating cash flow is much more difficult to influence through accounting measures. The KCV therefore provides a more objective picture of a company's economic performance.

2. informative value with regard to liquidity

A stable positive cash flow forms the basis of entrepreneurial capacity - for example for investments, debt repayment or dividend payments. The KCV directly shows the relationship between the current share price and the company's actual cash generation.

3. valuation benchmark in crises and for business models with strong substance

In economically uncertain phases or with fluctuating annual results, the cash flow can provide a more reliable basis for valuation than the profit reported in the balance sheet. A low KCV can indicate a robust, fundamentally strong company.

4. meaningful addition to other key figures

It adds an additional perspective to the analysis of key figures and often provides relevant information, particularly in the case of capital-intensive business models. While the price/earnings ratio (P/E ratio) can be heavily influenced by accounting effects such as depreciation and amortization, the KCV reflects the actual cash generation of a company. It can therefore be a More reliable assessment of operational performance and usefully supplement traditional valuation indicators.

In which areas is the application particularly useful?

A look at the ratio is particularly suitable for certain types of companies and industries in which the Cash flow provides better information than accounting profit:

• Capital-intensive industries (e.g. industry, energy, mechanical engineering): In these sectors, high levels of investment in plant and infrastructure are common. This results in High depreciation and amortizationwhich can significantly reduce the accounting profit although the actual cash flow remains stable. The KCV offers a clearer view of the real earning power of the company.
• Companies with irregular profits but stable cash flowThese include, for example, companies with special effects in the balance sheet, such as one-off tax provisions, reversals or impairments. These distort the annual profit, while the operating cash flow is a more constant measure of operational performance represents.

However, the key figure is less helpful in situations in which the Cash flow is not a stable benchmark or the business model is strongly geared towards growth:

• Companies with negative or strongly fluctuating cash flows: Many start-ups or young growth companies invest heavily in personnel, product development or expansion, which often means that No positive cash flow yet is generated. The KCV would either not be meaningful here or not calculable at all.
• Growth-oriented technology companiesIn fast-growing tech sectors, the focus is often on sales and user growth rather than short-term profitability. Here, key figures such as the Price/sales ratio (P/S ratio) often more suitable to reflect the company's potential.

Valuation of asset classes

Investors regularly look for attractive entry points. The KCV helps with this, favorably valued companies with a stable cash inflow.

• A low value can mean that a share is undervalued - provided that the cash flow is stable and sustainable.
• A suddenly increasing value can indicate overvaluation, especially if the price rises sharply but the cash flow stagnates.

Example: A company with constant cash flow and a rising share price has a growing KCV. This means that investors are paying increasingly more for the same performance. This can be interpreted as a signal of overheating.

The ratio is therefore well suited to Early identification of opportunities and risksespecially in connection with other key figures.

Limits and weaknesses of the KCV

As helpful as the key figure is, it also has some limitations:

• Not comparable across sectorsThe informative value is high within an industry, but difficult to compare between utilities and tech companies, for example.
• Cash flow is not always the same as cash flowA positive operating cash flow can also result from one-off effects. Investors should therefore also check the cash flow statement.
• Influence of accounting standardsDifferences in accounting (e.g. IFRS vs. US GAAP) can distort cash flow figures.
• Not suitable for banks or insurance companiesas their cash flow figures are often not very meaningful.

The KCV is therefore not the sole decision-making factor, but a valuable tool in the set of the fundamental stock analysis.

Conclusion: Using the price/cash flow ratio correctly

The KCV is a Important and often underestimated key figure for the valuation of companies. It helps investors to do this, the true value behind the share price based on real cash flows instead of balance sheet profits.

The KCV provides valuable information, particularly in capital-intensive sectors or for companies with fluctuating annual results:

• Financial stability,
• Liquidity and
• Possible under- or overvaluations.

In combination with other key figures, the KCV can help investors to make well-founded investment decisions and identify potentially undervalued shares at an early stage.

A final tip: Many financial portals allow you to display the KCV directly - often even with historical data. Observe the development over several quarters to identify trends and sharpen your analysis.