Price to Cash Flow Ratios
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Analysts may choose to value stocks based on price to cash flow ratios.
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The cash flow applied could be: Net Income plus Non-cash Charges (which is not correct); Cash Flow from Operations; Adjusted CFO; or Free Cash Flow to Equity.
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Positives of Cash Flow Ratios:
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Cash flows are more objective than earnings.
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When earnings are volatile, cash flow ratios will be more stable than the P/E ratio.
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Stock return trends can be analyzed within the context of differences in price to cash flow values.
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Drawbacks of Cash Flow Ratios:
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If Free Cash Flow to Equity is negative, then the P/FCFE metric cannot be used to value a stock.
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FCFE can be volatile.
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Cash flow approximation metrics can be misapplied by the analyst.