Price-to- Cash Flow (P/CF)

P/CF = market value of equity / cash flow = market value per share / cash flow per share
Where: cash flow = CF, adjusted CFO, FCFE, or EBITDA

Advantages:
· Less manipulated than earnings
· Tend to be less volatile
· Studies have indicated that it is a reliable metric over the longer-term.

Disadvantages:
· Some items are not included, such as non-cash revenue.

Different cash flow measures are used for different purposes.
Earning plus non cash charges
= net income + depreciation + amortization

Cash flow from operations (CFO)

Adjusted CFO

As CFO includes the items relating to financing and investing activities, need to adjust by adding back the after-tax interest cost
Adjusted CFO = CFO – {net cash interest (1-tax rate)}

Free Cash Flow to Equity (FCFE)

Defined as cash available to shareholders after funding capital required, working capital needs, debt financing requirements. It is more volatile than straight cash flow.

FCFE = (net income + depreciation + new debt issues) – (Capital Spending + additions to working capital + principal repayments)

EBITDA
Represent a flow to both equity and debt.

Price-to-Sales (P/S)

P/S = market value of equity / total sales = market price per share / sales per share

Advantages:
· Always positive, even for distressed firms
· Less manipulated
· Less volatile than P/E
· Useful for start ups and in mature or cyclical industries
· Studies has indicated low ratio outperform high ratio

Disadvantage:
· High sales growth does not guarantee high profit growth
· Does not reflect differing cost structures
· Revenue recognition can distort sales.

Price-to-Book Value (P/BV)

P/BV = Market value of equity / book value of equity = market price per share / book value per share

Advantages:
· Usually positive
· More stable than P/E
· useful for finance and commodity firms and for firms that have negative earnings
· Studies have indicated low ratio outperform low ratio

Disadvantages:
· high P/BV can result from high amount of fixed assets at historic cost
· low P/BV can occur when assets (bad debts) with less than bookvalues
· BV does not include non-physical assets e.g. patents
· May not be comparable between companies
· Accounting conventions cause differing BVs
· Book value is not an accurate measure of actual market value.

Note:
· Book value is commonly adjusted to tangible book value and balance sheets are adjusted for significant off-balance-sheet assets and liabilities.

Price-to-Earnings (P/E)

Trailing P/E = Market price per share / EPS over previous 12 months
Leading P/E = Market price per share / forecasted EPS over next 12 months

Advantages:
· Earning is a key determinant of value
· Easy to use
· Most commonly measure
· Studies have indicated a strong correlation to long-term average returns

Disadvantages:
· Not useful with negative earnings
· Earnings can be volatile
· Earnings are more easily manipulated