Top 5 Stock Entry Decisions: #2 - P/Cash
#2 – P/Cash:
If someone offered you a $5 bill in exchange for a $1 bill, you wouldn’t hesitate accepting. The stock market offers this deal to us on a daily basis, yet many traders are unaware that it even exists.
The Price-to-Cash ratio (P/Cash) ratio is the ultimate valuation metric. It is calculated by dividing the share price by the total cash per share.
For example, a company may have $10 in cash for every outstanding share, trading at a market price of $6. In this case the P/Cash ratio is .6.
Believe it or not, some companies trade at less than a 1 P/Cash ratio. This means for every dollar you invest, you are receiving a greater amount of cash back.
Cash is the hardest asset for a company to falsify, and the easier for external auditors to verify. This means you can generally trust that a company’s cash balance is correctly stated.
Before investing you need to ensure that a company will not lose this cash in the future (see the other stock entry decisions in this top 5 list), however P/Cash is still my favorite ratio. A company trading for less cash than it has on-hand is a strong sign of an undervalued company, and that’s what insightful investors focus on.
More to come over the next few days….