Question

Why would the Price / Cash Flow ratio be more informative for high Beta companies during a recession than the Price / Earnings ratio?

Answer 1

Answer:

Price/cash flow Ratio- This ratio is the relationship between market price per share and the per share operating cash flow of the company. This ratio uses the market price of share and the operating cash flow in which Non cash expenses (Depreciation & amortization) are added back to Net Income.

This ratio compares the market value of a company to its operating cash flow. A low ratio means that the stock is undervalued.

Formula: Price to cash flow ratio = Market price per share / Operating cash flow per share

Price/Earning ratio- This ratio is the relationship between current market price of share and earning per share. This ratio determines how much investors are paying for single stock and how much they are getting from that stock.

Formula- Current price of stock / Earning per share

High beta companies' stocks- Beta is a measurement of stock's volatility with respect to the overall market. These stocks are more volatile and riskier but provide higher returns too.

Price / Cash Flow ratio be more informative for high Beta companies during a recession than the Price / Earnings ratio- Yes, this is true. In the recession, stock price goes down and earning per share also goes down so true position cannot be estimated. P/CF ratio determines how much a company generates cash flow relative to its stock price not the earnings as determined by the P/E multiple. Cash flows cannot be manipulated easily as earnings can be, that is the reason, during the recession time, P/CF is better than P/E.