Is Cash Flow King in Valuations?
Posted: 19 Apr 2007
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. The question addressed in the article is whether the balance tilts in favor of cash flows when the following are considered: (1) forecasts rather than reported numbers, (2) dividends rather than operating cash flows, (3) individual industries rather than all industries combined, and (4) companies in non-U.S. markets. In all cases studied, earnings dominated operating cash flows and dividends.
Keywords: Equity Investments, Fundamental Analysis and Valuation Models, Industry Analysis
JEL Classification: G12, G14, G32, G35, M41
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