What Is the Cash-Adjusted P/E Ratio? Free Calculator Included
The Cash-Adjusted Price-to-Earnings (P/E) Ratio provides a clearer picture of a company’s valuation by removing the impact of excess cash and interest income, which can skew the traditional P/E ratio. This adjustment helps investors identify both undervalued opportunities and potential risks. We also have a free cash-adjusted P/E ratio calculator that we’ll explain how to use. Let’s dive right in.
How to Calculate the Cash-Adjusted P/E Ratio
Below is the formula for the cash-adjusted P/E ratio:
Calculating the cash-adjusted P/E:
Start with the Market Cap: This is the total value of the company’s shares.
Subtract Cash and Short-Term Investments from the market cap: These are the liquid assets that aren’t directly contributing to the company’s core earnings.
Calculate Net Earnings Minus Interest Income: This step focuses on the company’s operational earnings by removing interest income, which is generated from cash reserves.
Plug them into the formula above, and voila! That’s it.
Still too much work? We make it a bit easier with our calculator. Read below.
A Real-Life Example on GOOGL Stock Using Our Calculator
Let’s use a real-life company as an example. We’ll use Alphabet stock (NASDAQ:GOOGL).
Here are the inputs for GOOGL stock.
Market cap: $2.016 trillion
Cash and short-term investments: $100.7 billion
Net income: $87.657 billion
Interest income: $4.327 billion
You then input them into the calculator, which you can find here, and it’ll spit out the result for you. As you can see below, GOOGL’s cash-adjusted P/E ratio is currently 22.98x.
Oddly enough, its regular P/E ratio is also 23x, but there are times when the numbers are very far off, and that can tell you crucial information, as we’ll explain later on.
How Can I Easily Find This Financial Data?
Before we talk about how to analyze the cash-adjusted P/E, you may be wondering, where can I easily find metrics like interest income and cash and short-term investments without having to dig into filings? There are many platforms out there, but for the example above, we used Finbox. On Finbox, you can search the metric and easily find it. Here’s an example below for Alphabet’s interest income.
How to Find Undervalued Companies with the Cash-Adjusted P/E Ratio
Consider Company A, which has a traditional P/E ratio of 20x and substantial cash reserves. After calculating the Cash-Adjusted P/E ratio, you find that it’s 10x. This suggests the company might be more undervalued than it appears. The lower ratio indicates that the company could use its cash for buybacks or dividends, potentially boosting its value. Investors who spot this might see an opportunity that the broader market has overlooked.
Exposing Companies with Questionable Earnings
Now, take Company B. It has a traditional P/E ratio of 10x, but when you adjust for cash and interest income, the P/E ratio actually turns negative. This happens because the company’s operating income is negative, meaning its earnings are primarily from interest income on cash reserves. This is a red flag—if the cash reserves diminish, so will the earnings, revealing the company's operational struggles. The Cash-Adjusted P/E ratio in this scenario exposes that the company is not as profitable as the traditional P/E ratio suggests.
Use Our Cash-Adjusted P/E Ratio Calculator Here
Our Cash-Adjusted P/E Ratio Calculator makes these calculations straightforward. By entering the market capitalization, cash & short-term investments, and earnings, the calculator adjusts for these factors and gives you a more accurate P/E ratio. This helps you make informed decisions—identifying truly undervalued stocks or avoiding companies whose earnings are unsustainable.
Thanks for reading! You may also be interested in checking out all our other calculators here.
