Price Multiples - P/CF

Question 1

What is the advantages to cash flow

Answer 1

1. less subject to manipulation
2. generally more stable than earnings
3. addresses the issue of differences in accounting conservatism

Question 2

What are the drawbacks to price to cash flow

Answer 2

1. Analysts can treat Cash flow as EPS + Non Cash Charges, but this can ignore things such as noncash revenue, changes in working capital (as these would be part of earnings)
2. FCFE would be better but FCFE is usually more volatile than cash flow and/or negative
3. Companies can still manipulate their operating cash flow e.g. securitising recievables (selling accounts AR for upfront cash) or outsourcing AP (arranging for third party to pay suppliers, and then paying the third party later)

Question 3

Stable free cash flow to equity

Answer 3

Is best for