Price to Cash Flow Ratios

Analysts may choose to value stocks based on price to cash flow ratios.

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.

Positives of Cash Flow Ratios:

Cash flows are more objective than earnings.

When earnings are volatile, cash flow ratios will be more stable than the P/E ratio.

Stock return trends can be analyzed within the context of differences in price to cash flow values.

Drawbacks of Cash Flow Ratios:

If Free Cash Flow to Equity is negative, then the P/FCFE metric cannot be used to value a stock.

FCFE can be volatile.

Cash flow approximation metrics can be misapplied by the analyst.