CFA Level II Exam · Market-Based Valuation: Price and Enterprise Value Multiples

Price to Sales and Price to Cash Flow Multiples

Updated 7 October 2026 · Fact-checked

Price to sales (P/S) is market price per share divided by sales per share. Price to cash flow (P/CF) is price divided by a cash flow measure per share, such as CFO, EBITDA or FCFE. To solve questions, pick the right numerator and denominator, compute the multiple, then compare it with a benchmark.

Understand Price to Sales and Price to Cash Flow Multiples

A price multiple compares what the market pays for a share with a fundamental per share. P/S uses sales. P/CF uses a cash flow measure. You use them when earnings are negative, volatile or easy to distort.

P/S works for loss-making firms because sales are almost always positive. Sales are also harder to manipulate than earnings and less volatile. The cost is that sales ignore cost structure. Two firms with the same sales can have very different profit margins, so P/S can look cheap for a firm that cannot turn sales into profit.

P/CF is used because cash flow is harder to manipulate than earnings and is more stable than EPS. It also helps when firms differ in accounting choices. The variants are: P/CF with cash flow defined as net income plus non-cash charges, P/CFO using operating cash flow, P/EBITDA, and P/FCFE. Each variant measures a different thing, so you must match the variant to the question.

Determinants: The justified P/S derived from the dividend discount model (Gordon growth) depends on four inputs: the profit margin, the dividend payout ratio, the growth rate and the required return. Holding the others constant, it rises with the profit margin, the dividend payout ratio and the growth rate, and falls with the required return. Do not confuse this dividend payout ratio with the FCFE payout used in free cash flow models. Higher margin means more profit per unit of sales, so a higher justified P/S. Justified P/CF is the same kind of function of expected cash flow growth and the required return. Faster expected cash flow growth and a lower required return give a higher multiple.

Pitfalls: Simple CF (net income plus depreciation and amortization) ignores working capital changes and non-cash revenue, so it can mislead. EBITDA ignores capital spending and working capital, and it is a pre-interest figure. A pre-interest measure should match enterprise value, not equity price. FCFE is closely tied to valuation theory but is more volatile and can be negative.

Key formulas to remember

Price to sales: P/S = Market price per share ÷ Sales per share = Market cap ÷ Total sales; Use the same period (trailing or forward) for all comparables.
Price to cash flow: P/CF = Market price per share ÷ Cash flow per share; State which cash flow: CF, CFO, EBITDA or FCFE. Do not mix variants.
Simple cash flow: CF = Net income + Depreciation + Amortization (+ other non-cash charges); Ignores working capital changes and non-cash revenue.
FCFE: FCFE = CFO − Fixed capital investment + Net borrowing; Cash available to common shareholders after reinvestment and debt flows.
Justified P/S from the Gordon growth model: Trailing: P0/S0 = (E0/S0) × Payout × (1 + g) ÷ (r − g) Leading: P0/S1 = (E1/S1) × Payout ÷ (r − g); E0/S0 is the trailing profit margin and E1/S1 is the forward profit margin. Match the margin to the sales period in the denominator. Payout is the dividend payout ratio = 1 − retention rate. Requires r > g.
Implied value from a multiple: Value per share = Benchmark multiple × Subject's sales (or cash flow) per share; Benchmark can be peer median, sector or the firm's own history.

How to solve Price to Sales and Price to Cash Flow Multiples questions

Use this order for any P/S or P/CF question in an item set.

1Read the question and decide what is asked: compute a multiple, find an implied value, compare firms or judge suitability.
2Locate the exhibit data: price, shares outstanding, sales, net income, depreciation, CFO, capex, net borrowing. Check units (millions vs per share) and the period (trailing or forward).
3Identify the exact cash flow variant the question uses. If it is not given, build it from the definitions.
4Compute the per share figure first, then the multiple. For market cap, use price × shares.
5Compare with the benchmark on a like for like basis: same variant, same period, similar business model and margin.
6Explain differences using determinants: margin, payout, growth, risk and accounting quality. A high P/S needs a high margin or growth to be justified.
7Check the answer for sense. A negative cash flow gives a meaningless multiple; a P/S very low with weak margins may be a value trap.

Quickest way: Multiple times metric, then adjust for margin

When to use it: When a question asks for an implied price or which firm looks cheaper.

Multiply the benchmark multiple by the subject's metric per share to get the implied price.
Compare implied price to market price: implied above market means undervalued on that measure.
To rank firms, divide each P/S by its profit margin. This gives price per unit of profit, a quick check that P/S is not cheap only because margins are low.
Eliminate options that mix variants, such as an EBITDA multiple applied to net income.

Common mistakes in Price to Sales and Price to Cash Flow Multiples

Using total market cap with per share sales (or the reverse).
Exhibits give figures in millions and per share mixed together.
Fix: Put both numerator and denominator on the same basis before dividing.
Saying P/S is useful because it shows profitability.
Students confuse sales stability with earnings information.
Fix: Remember P/S ignores costs. Two firms with equal sales can have very different margins.
Treating all P/CF variants as interchangeable.
The labels look alike.
Fix: Write the cash flow definition next to each multiple. Simple CF, CFO, EBITDA and FCFE answer different questions.
Ignoring that EBITDA is pre-interest and so fits enterprise value better than equity price.
Students focus on the word cash flow.
Fix: Flag the mismatch. Price with EBITDA is a weaker pairing than EV/EBITDA.
Claiming simple CF captures all cash. It ignores working capital changes and non-cash revenue.
Adding back depreciation feels like the full cash adjustment.
Fix: State that CFO or FCFE is more complete, and that simple CF can hide aggressive revenue recognition.
Applying the justified P/S formula when r ≤ g.
Formula used mechanically.
Fix: Check r > g first. If not, the Gordon growth based formula is invalid.

Worked examples

Example 1

Vignette: Zenith Retail has 40 million shares at ₹300 each. Annual sales are ₹9,600 million. Net income is ₹480 million. The peer median P/S is 1.5. Questions: (1) What is Zenith's P/S? (2) What is the implied price using the peer P/S? (3) What is Zenith's profit margin?

Show the solution

Market cap = 40 million × ₹300 = ₹12,000 million.
P/S = 12,000 ÷ 9,600 = 1.25.
Sales per share = 9,600 ÷ 40 = ₹240. Implied price = 1.5 × 240 = ₹360.
Profit margin = 480 ÷ 9,600 = 5%.

Answer: (1) P/S = 1.25. (2) Implied price = ₹360, above the ₹300 market price, so Zenith looks undervalued on P/S alone. (3) Profit margin = 5%. Check the peers' margins before concluding, since a lower margin could justify the lower multiple.

Example 2

Vignette: Orion Tech has net income of $60 million, depreciation and amortization of $40 million, CFO of $110 million, fixed capital investment of $70 million, and net borrowing of $10 million. It has 25 million shares priced at $32. Questions: (1) Compute P/CF using simple cash flow. (2) Compute P/FCFE. (3) Which is more complete and why?

Show the solution

Simple CF = 60 + 40 = $100 million. Per share = 100 ÷ 25 = $4.00. P/CF = 32 ÷ 4.00 = 8.0.
FCFE = CFO − FCInv + Net borrowing = 110 − 70 + 10 = $50 million. Per share = 50 ÷ 25 = $2.00. P/FCFE = 32 ÷ 2.00 = 16.0.
Simple CF ignores working capital changes and other operating items, and it ignores capital spending. FCFE starts from CFO, which includes working capital effects and other operating items, and deducts fixed capital investment, so it reflects reinvestment. Net borrowing is a financing adjustment: it makes FCFE show cash available to equity holders, but it also makes FCFE sensitive to financing decisions. Reconcile the gap: CFO is $10 million above simple CF (110 − 100). The vignette does not split this difference, so it reflects working capital and other items, not only working capital. Capital investment deducts $70 million, and net borrowing adds $10 million. Check: 100 + 10 − 70 + 10 = 50.

Answer: (1) P/CF = 8.0. (2) P/FCFE = 16.0. (3) FCFE is more complete because it includes working capital and other operating items (through CFO) and deducts reinvestment. Net borrowing is a financing adjustment that makes FCFE reflect cash available to equity holders, though it also adds sensitivity to financing. FCFE is $50 million, which is $50 million below simple CF: +$10 million from CFO above simple CF (working capital and other items), −$70 million of capital investment and +$10 million of net borrowing. The simple CF multiple of 8.0 looks cheaper than the P/FCFE of 16.0 suggests.

Exam tips

Always check which cash flow variant the vignette uses before computing. A wrong variant is the usual trap.
If a question asks why P/S is attractive, think: positive for loss-making firms, less volatile, harder to manipulate. If it asks the weakness, think: ignores cost structure and cash flow.
Compare P/S across firms only with similar margins and business models. Expect options that ignore margin differences.
For justified P/S, confirm r > g and use the trailing or leading form that matches the given sales figure.
Wrong answers carry no penalty, so eliminate options with mismatched numerators and denominators, then choose.

Price to Sales and Price to Cash Flow Multiples in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Price to Sales and Price to Cash Flow Multiples: frequently asked questions

When should I use P/S instead of P/E?

Use P/S when earnings are negative, very volatile or distorted by accounting choices, as with young or cyclical firms. P/E is better when earnings are positive and reliable, since it reflects profitability. P/S ignores costs, so use it with margin analysis.

What is the difference between P/CF and P/FCFE?

P/CF can use several definitions, often net income plus non-cash charges or CFO. P/FCFE uses free cash flow to equity, which deducts capital spending and adds net borrowing. P/FCFE is closer to the cash truly available to shareholders but is more volatile.

How do I calculate the price to cash flow ratio?

Divide price per share by cash flow per share, or market cap by total cash flow. State the cash flow measure first, such as CFO or net income plus depreciation and amortization. Use the same measure for every firm you compare.

Why is EBITDA a weak match for a price multiple?

EBITDA is earned before interest, so it belongs to all capital providers, not only shareholders. Price reflects equity value only. EV/EBITDA matches the numerator and denominator better.