Explain the various cash flow definitions used in multiples of price and of enterprise value (EV) and where each falls short
The idea
Several cash flow definitions appear in multiples. Earnings plus non-cash charges, roughly EPS plus depreciation and amortisation per share, is simple but ignores working capital and capital spending. Adjusted cash flow from operations removes non-recurring items from CFO but still ignores capital spending. FCFE is theoretically preferable because it measures the cash available to shareholders after investment, but it is often volatile and can be negative. EBITDA is a flow available to all providers of capital, so it belongs with enterprise value rather than share price; it ignores taxes and capital spending. Differences in where interest paid is classified affect comparisons between IFRS and US GAAP reporters. The trap is pairing a firm-level flow such as EBITDA with price per share.
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Take the free diagnostic →More in Market-Based Valuation: Price and Enterprise Value Multiples
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