I was listening to Alan Greenspan yesterday and he was discussing E/P ratios, the inverse relationship to the P/E ratio. This came up as he was giving color to the professionalism of the FED and discussing 10 - Year Treasury bond yields as a standard valuation tool when analyzing/comparing the strength of individual companies/sectors.
This led me down a research rabbit hole to FCF or Free Cash Flow. Whenever I analyze a company, I always look at the cash flow statement, especially if a company shows no income or P/E ratio. This allows me to see if the company at some level, is building strength over time. Not having a P/E ratio, or having an absurdly high P/E ratio, say north of 25, should not be the end of the road when deciding when/if to buy.
As a result, I discovered this ratio: FCF (Free Cash Flow) per share = FCF/total shares outstanding.
This ratio allows for a quick snap shot to see if I should investigate more. FCF is found at the bottom of the Cash Flow Statement and should be normalized by averaging 6 - 7 years if possible.
As a result, I am able to guesstimate how much liquid cash a company has in relation to its total shares outstanding. The logic follows that a business should have 3:1 cash flow to operating expenses as a sign of balanced financial health.
If a company has too much cash, more the 3:1, I then look to how they are investing and if they are expanding their business to stay competitive. Too much cash can be as bad as not enough cash. Too much cash may point to poor executive management and an ineffective use of cash reserves.
If the FCF is below 3:1, I do the same thing, I look at how the company is spending free cash, but also looking closer at their debt obligations and annual revenue. Also, with emerging companies, cash may be used to vastly expand operations and invest new capital. This could point towards future growth and a positive indicator towards a BUY projection.
This led me down a research rabbit hole to FCF or Free Cash Flow. Whenever I analyze a company, I always look at the cash flow statement, especially if a company shows no income or P/E ratio. This allows me to see if the company at some level, is building strength over time. Not having a P/E ratio, or having an absurdly high P/E ratio, say north of 25, should not be the end of the road when deciding when/if to buy.
As a result, I discovered this ratio: FCF (Free Cash Flow) per share = FCF/total shares outstanding.
This ratio allows for a quick snap shot to see if I should investigate more. FCF is found at the bottom of the Cash Flow Statement and should be normalized by averaging 6 - 7 years if possible.
As a result, I am able to guesstimate how much liquid cash a company has in relation to its total shares outstanding. The logic follows that a business should have 3:1 cash flow to operating expenses as a sign of balanced financial health.
If a company has too much cash, more the 3:1, I then look to how they are investing and if they are expanding their business to stay competitive. Too much cash can be as bad as not enough cash. Too much cash may point to poor executive management and an ineffective use of cash reserves.
If the FCF is below 3:1, I do the same thing, I look at how the company is spending free cash, but also looking closer at their debt obligations and annual revenue. Also, with emerging companies, cash may be used to vastly expand operations and invest new capital. This could point towards future growth and a positive indicator towards a BUY projection.
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