Monday, January 24, 2011

Video: Price to Cash Flow

I am always looking for new ways to evaluate potential investment possibilities.

I think I ran across one that I will check in more detail. At my first glace, it looks like it might be pretty good.

A lot of people rely on the Price/Earnings ratio, but this video shows an approach that relies on the Price per Cash Flow (Price/Cash Flow) metric instead.

Price/Cash Flow compares the stock price/share (market value/share) to the amount of cash flow/share.

We know that cash is VITAL for a company to maintain its operations. Plus, the price/cash flow is more difficult to manipulate "for the books" than the more popular price/earnings and many other measurements are.

Here is a video with Kevin Matras and Terry Ruffolo from that explains the scanning technique a little better:

Suggested Guidelines (according to the video)

Price/Cash Flow <> 40 yield (on average) -7% annually (That's NEGATIVE, folks!)

However, this video is careful to note that "good" Price/Cash Flow figures vary by industry. Make sure that you compare the figure from "your" company to others within its specific industry.

Screening Criteria: Price/Cash Flow
  1. Zack's Rank = 1
    (This makes sure that only "Strong Buys" get through the filter.)
  2. 1-Year Projected Growth Rate >= S&P Average
    (This seeks above-market growth rates.)
  3. Current Cash Flow >= 5-Year Cash Flow
    (This ensures that the company's cash flow position is GROWING.)
  4. Price/Cash Flow <= Industry Median
    (Make sure that it's a bargain within the industry, and the median avoids data figure skewing.)
Like I mentioned earlier, I have not tested this model, but it seems like it makes sense. Like I suggest with EVERY new idea you have (hear or read), I suggest that you test it with play money before using your REAL money. At least, that's what I will do!

No comments:

Post a Comment