The World without Bankruptcy Laws
Bankruptcy is one of the natural states which a company may find itself in. Entrepreneurship is primarily about taking risks. When companies take risks, some of them succeed, whereas others fail. Hence failure is a natural part of the business. However, many critics of bankruptcy laws believe that there isn’t a need for an elaborate […]
The Wirecard and Infosys Scandals are a Lesson on How NOT to Treat Whistleblowers
What is the Wirecard Scandal all about and Why it is a Wakeup Call for Whistleblowers Anyone who has been following financial and business news over the last couple of years would have heard about Wirecard, the embattled German payments firm that had to file for bankruptcy after serious and humungous frauds were uncovered leading […]
Why the Digital Age Demands Decision Makers to be Like Elite Marines and Zen Monks
How Modern Decision Makers Have to Confront Present Shock and Information Overload We live in times when Information Overload is getting the better of cognitive abilities to absorb and process the needed data and information to make informed decisions. In addition, the Digital Age has also engendered the Present Shock of Virality and Instant Gratification […]
Why Indian Firms Must Strive for Strategic Autonomy in Their Geoeconomic Strategies
Geopolitics, Economics, and Geoeconomics In the evolving global trading and economic system, firms and corporates are impacted as much by the economic policies of nations as they are by the geopolitical and foreign policies. In other words, any global firm wishing to do business in the international sphere has to be cognizant of both the […]
Why Government Should Not Invest Public Money in Sports Stadiums Used by Professional Franchises
In the previous article, we have already come across some of the reasons why the government should not encourage funding of stadiums that are to be used by private franchises. We have already seen that the entire mechanism of government funding ends up being a regressive tax on the citizens of a particular city who […]
“Cash is King” say the bigwigs on Wall Street. That is why the valuation of shares is done on the basis of discounted cash flow model rather than discounted earnings model.
The price to cash flow ratio provides an analyst with a shortcut for finding companies that have been undervalued in comparison to their cash flows.
Analysts can scan through the price to cash flow ratios of a number of companies. Then they can start paying more attention to the companies where these values seem to be abnormally low. This article describes price to cash flow ratio is more detail.
There are many different measures of what analysts consider to be the true cash flow of the company. Some analysts consider operating cash flow i.e. cash flow generated from regular activities to be the correct measure. Others think that the capital investments that the company needs to make must be separated and the resultant free cash flow provides a better picture of the company’s fundamentals.
Accordingly there are at least two cash flow measures that an analyst can look at and here are their formulas:
Price to Operating Cash Flow = Current Market Price / Operating Cash Flow
Price to Free Cash Flow = Current Market Price / Free Cash Flow
The price to cash flow ratio tells the investor the number of rupees that they are paying for every rupee in cash flow that the company earns. Thus if the price to cash flow ratio is 3, then the investors are paying 3 rupees for a stream of future cash flows of 1 rupee each. This cash flow is passed on to the investors as dividend. In case, it is reinvested in the business, it shows up as capital appreciation. Thus cash flow will help the investors gain in one way or another.
Charges like depreciation, changes in inventory and revenue policy do not affect the cash position making it the favorite of skeptics.
Your email address will not be published. Required fields are marked *
Why are Corporations Hoarding Trillions in Cash?
February 7, 2025
Why College Education Should Not Be Free?
February 7, 2025
Why Do Mutual Funds Lend To Promoters?
February 7, 2025
