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.

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