Cash Flow is King? Comparing Valuations Based on Cash Flow Versus Earnings Multiples

19 Pages Posted: 25 Aug 2006

See all articles by Jing Liu

Jing Liu

The Cheung Kong Graduate School of Business

Jacob K. Thomas

Yale School of Management

Doron Nissim

Columbia University - Columbia Business School

Date Written: August 25, 2006

Abstract

Contrary to the common perception that operating cash flows are better than accounting earnings at explaining equity valuations, recent studies suggest that valuations derived from industry multiples based on reported earnings are closer to traded prices than those based on reported operating cash flows. We extend those analyses to determine if the balance tilts in favor of cash flows when we consider a) forecasts rather than reported numbers, b) dividends rather than operating cash flows, c) individual industries rather than all industries combined, and d) firms in other markets beyond the U.S. Our main finding is that in all venues cash flows (both operating and dividends) are dominated by earnings. Our results imply that those seeking quick valuations should use multiples based on forecasted earnings, since they are remarkably close to traded prices.

Keywords: cash flows, earnings, valuation, multiples

JEL Classification: G12, G14, G29, G35, M41

Suggested Citation

Liu, Jing and Thomas, Jacob Kandathil and Nissim, Doron, Cash Flow is King? Comparing Valuations Based on Cash Flow Versus Earnings Multiples (August 25, 2006). Available at SSRN: https://ssrn.com/abstract=926428 or http://dx.doi.org/10.2139/ssrn.926428

Jing Liu

The Cheung Kong Graduate School of Business ( email )

1 East Changan Avenue, Oriental Plaza
E3/3F
Beijing
China

Jacob Kandathil Thomas (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Doron Nissim

Columbia University - Columbia Business School ( email )

3022 Broadway
604 Uris Hall
New York, NY 10027
United States
212-854-4249 (Phone)

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