Home›ETFs & Funds›Fund Industry›Free cash flow may better show intrinsic value than P/…

Free cash flow may better show intrinsic value than P/E or P/B

Reported · Written up by our desk · Fund Industry

ETF Trends argues that common value metrics like price-to-earnings and price-to-book can be distorted because they rely on accounting outputs, and accounting rules allow discretion in areas such as non-cash expenses, depreciation schedules, and goodwill write-downs.

The outlet says free cash flow can provide a clearer picture because it measures the cash a business generates after accounting for capital expenditures needed to maintain or expand its asset base.

ETF Trends notes that accounting earnings can stay positive even when a company is using cash, such as when inventory builds or customer receivables remain unpaid.

As an example, it describes a retailer paying cash to build inventory while costs remain on the balance sheet until goods sell, meaning net income can rise even as free cash flow turns negative if inventory does not sell.

More like this

Sources