Many investors focus on cash flow from operations instead of net income because there's less room for management to manipulate, or accounting rules to distort, cash flow.
If net income is much larger than cash flow from operations, it's a signal that the company's earnings quality-the usefulness of earnings-is questionable.
If cash flow from operations exceeds net income, on the other hand, the company may be much healthier than its net income suggests.
Therefore to value a stock we will use the price/cash-flow ratio.
The share price divided by cash flow from operations per share-instead of the P/E ratio.
No comments:
Post a Comment