Jock Taxes: Pros and Cons
In the previous article, we have already understood what Jock Taxes are. We also had a closer look at the reason why states levy jock taxes. However, there are many experts who believe that levying jock taxes is counterproductive. This is because of the fact that there are more disadvantages associated with jock taxes as […]
What are Profit Margins ?
The untrained investor uses profit and profit margin interchangeably. This is not technically correct. The difference may be minor but it is vital. This article will explain about profit margins in detail. Profit vs. Profit Margins Profit and profitability are two different things. Although they may be closely related, they have a subtle difference. Profit […]
Challenges to Investment Banking Business
Investment banking has traditionally been a lucrative business. Investment bankers have always been in the news for the excessive amount of money that they made while the rest of the world was struggling. However, the relentless negative publicity that the industry has received in the past has changed the way it functions. Also, external circumstances […]
Restricted Stock Options (RSU’s)
In the previous article, we have already studied about option pools. We now know the various advantages that they offer and why they are preferred by startup companies as a means to compensate their employees. However, some companies and investors are not happy with the concept of stock option pools. This is because they dilute […]
History of Corporate Taxation
In 2019, President Donald Trump created outrage when he decided to lower the tax rates of corporations. Donald Trump was of the opinion that high corporate tax rates in the United States are making domestic companies uncompetitive. As a result, companies are choosing to incorporate out of America. Donald Trump enacted a law that allowed […]
“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.
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