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Basic Question 11 of 11
Which of the following statements is the LEAST ACCURATE with respect to the rationales and drawbacks of using the price-to-cash-flow (P/CF) ratio for valuation purposes?
B. Cash flow is much less subject to manipulation than earnings, thus allowing for a more sound comparison of P/CF among various firms. The P/CF ratio neutralizes any quality of earnings differences which may exist among firms.
C. Even when earnings are negative, free cash flow measures usually are positive, thus allowing a more frequent use of P/CF.
A. If the definition of cash flow is simply net income plus any non-cash charges, then this metric may be influenced by accounting options.
B. Cash flow is much less subject to manipulation than earnings, thus allowing for a more sound comparison of P/CF among various firms. The P/CF ratio neutralizes any quality of earnings differences which may exist among firms.
C. Even when earnings are negative, free cash flow measures usually are positive, thus allowing a more frequent use of P/CF.
User Contributed Comments 3
| User | Comment |
|---|---|
| 2014 | In FRA, we learned it is myth that Cashflow are not subject to manipulation |
| stevo | I agree, I would have thought that B would be the least accurate as cash flow can be manipulated by accounting options chosen. I guess because B stipulates that it is "much less" and does not rule out the possibility of manipulation. |
| MathLoser | I haven't seen any fin statement that has negative Net Income but positive free cash flow. |
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Learning Outcome Statements
explain the rationale for using price multiples to value equity, how the price to earnings multiple relates to fundamentals, and the use of multiples based on comparables
calculate and interpret the following multiples: price to earnings, price to an estimate of operating cash flow, price to sales, and price to book value
CFA® 2024 Level I Curriculum, Volume 3, Module 8.