JAKARTA, CNBC Indonesia – For those of you who have entered the world of stock investment, you may be familiar with valuation methods such as price to earnings ratio (PE Ratio) and price to book value (PBV). However, don't overlook the fact that there are other interesting approaches to explore, which can help you predict when your investment will be capitalized.

The approach in question is to know the value of the EV/CFO ratio. EV/CFO is a ratio that compares enterprise value with operational cash flow. This ratio gives an idea of ​​how long it takes to earn back capital when someone acquires the company.

For example, if the EV/CFO value is 10, it means it will take 10 years to earn back the capital. On the other hand, if the value is close to zero, it indicates a potential return of capital in less than a year.

Next, let's discuss in detail the EV/CFO method.

Enterprise Value (EV)

EV reflects the total value of the company at this time. The formula for calculating EV is:

(Market capitalization + bank debt) – cash and cash equivalents

The use of EV is especially relevant for those who plan to acquire a company, because EV takes into account the company's debt. When we acquire a company, we will inherit its debt and get assets in the form of existing cash.

Assessing a company based on EV is considered more accurate than just using market capitalization (market cap), because market cap is greatly influenced by the share price and number of shares outstanding.

Operational Cash Flow

Operational cash flow is the amount of money generated from a company's operational activities in a period. Information regarding operational cash flow can usually be found in annual or quarterly financial reports.

Cash inflow includes cash receipts from the sale of goods and services to customers, while cash outflow includes payments to suppliers, employee salaries, and other operational costs.

Negative cash flow indicates that operational expenses exceed revenue from sales. Conversely, positive cash flow indicates good operational performance.

Operational cash flow is an important indicator for evaluating a company's ability to generate income.

EV/CFO Calculation Simulation

Let's look at an example of a stock valuation calculation simulation using the EV/CFO method. For example, in company A's financial statements there is the following data:

By using the EV formula, we can calculate that company A's EV is IDR 104 billion. Next, by dividing EV by operational cash flow, we get an EV/CFO value of 0.6 times. This indicates that the invested capital will be returned within six months, based on the latest conditions in the financial statements.

In essence, the lower the EV/CFO value, the faster your capital will be returned.

PER & PBV can complete your stock analysis

The existence of the EV/CFO method does not mean that PER and PBV are irrelevant. PER and PBV still have an important role in evaluating stock prices based on earnings and book value.

PER and PBV can still be a guide for determining the right time to buy shares. Thus, these three methods can complement each other in your investment analysis.

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