Capex/Cashflow ratio

Research
1

here is an article I came across and wanted to use it as a test since i am really new to p123. I dont know if i am doing something wrong but it doesnt seem to work when i use this as a ranking system

Capex to Cash Flow Ratio: Why Is No Investor Using This Valuation Hack?

2

Try this: OperCashFlTTM/CapExTTM, higher values better. Backtested on the Easy-to-Trade Universe against stocks in the same sector over the last 12 years with a 4-week rebalance I get this:

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You don't want to use CapExTTM/OperCashFlTTM with lower values better because operating cash flow is quite often negative while capital expenditures are very rarely negative.

3

this makes sense. thanks

4

Welcome to the community. I'm going to be pedantic here as I'm reading a difference in term usage. The ratio you are asking about is a single factor. It can be used in a screen to subset a universe, which is the set of stocks that you have declared a willingness to buy if select. It can also be used as a weighted component of a "Ranking System" against the entire universe.

I read you asking the question as a single factor being the entire ranking system which is not usual practice. Using Between(FRank("1/NI2CapExTTM" , #Industry, #ASC, #InclNA), 75, 100) as a single rule in a screen to give the lowest quarter values in each industry. With a liquidity constrained NOOTC universe with 10 stocks and the "Core: Value" Ranking System weekly executed single 2021, it produces credible results for a single factor.

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Using "Core: Growth" is nearly as good.

Cheers,
Rich

1 Like
5

Thanks Rich! this is very helpful

6

You are welcome.

Thank you for bringing this Quality factor to my attention. I continued to develop the screen above and have decided to fund it. It dropped into the funding race as the leader which means a triple position size. This translates into a 17.6% of equity allocation position size.

Cheers,
Rich

7

I just wanted to point out that there's a large difference between OperCashFlTTM/CapExTTM (the subject of the original post) and NI2CapExTTM (the factor you used in your chart). One measures operating cash flow and the other net income. You're probably aware of that, but I just wanted to make sure.

8

I didn't realize that. I thought that I had gotten lucky and there was a precalculated value. Using it with good results falls into the category of happy accident.

Cheers,
Rich