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.
- Equity Analysis Part 3 - Introduction
- Free Cash Flow Valuation
- One, Two, and Three Stage FCF Calculations
- Share Price Multiple Methods in Equity Valuation
- Price to Earnings (P/E) Ratio (Leading P/E and Trailing P/E)
- Price to Book (P/B) Value Ratio and Equity Valuation
- Price to Sales (P/S) Ratio
- Price to Cash Flow Ratios
- Enterprise Value (EV) to EBITDA
- Dividend Yield for Valuing Equity
- Residual Income (RI) Valuation Model