PE Ratio or P/FCF Ratio?

Hi,

Just like the view of VBs here...

I am sure some of you will have a checklist. I have 1 too. But recently, I am considering enhancing it.

I am considering changing "Price to Average Earning Over 5 years" to "Price to Average FCF Over 5 Years". The rational is that FCF will grow cash portion in Balance sheet and take out all non-cash items in the income statement.

So just wondering does any of you uses P/FCF for calculation if the stock price is undervalued? If yes, possible to advise how it impact your views/stock selection?

Furthermore, I understand FCF has many ways to calculate. Just wondering if this is true, FCF=Net Cash from operating activities - Net Cap ex?

Thank you.

http://tubinvesting.blogspot.sg/

(20-05-2016, 08:58 AM)TUBInvesting Wrote: Hi,

Just like the view of VBs here...

I am sure some of you will have a checklist. I have 1 too. But recently, I am considering enhancing it.

I am considering changing "Price to Average Earning Over 5 years" to "Price to Average FCF Over 5 Years". The rational is that FCF will grow cash portion in Balance sheet and take out all non-cash items in the income statement.

So just wondering does any of you uses P/FCF for calculation if the stock price is undervalued? If yes, possible to advise how it impact your views/stock selection?

Furthermore, I understand FCF has many ways to calculate. Just wondering if this is true, FCF=Net Cash from operating activities - Net Cap ex?

Thank you.

http://tubinvesting.blogspot.sg/

Unless you do over 10 years or longer period, the 5 years may catch the peak of business cycle and things look good. Then when you buy at peak, business cycle might turnaround and you may sell after holding 5 years at the cycle bottom, consoling yourself by saying you sold due to "change in fundamentals"

IMHO both metrics are not the true essence of value investing.

The only thing i use price for is to compare the 10 year highs and lows to have a guide how low it can go and the other is for calculating the dividend yield, which will use price and average payouts for past 5-10 years

Simple ratios are filters. And we should always remember it is just a filter that doesn't take away more detailed analysis. Otherwise like I always say, my secondary school girl can also invest professionally

That said I think P/FCF (including WC) is a much better metric than PE from a businessman point of view. Earnings can be affected by too many accounting adjustments, while operating cash is more realistic. But then again Mr Market is usually more obsessed with PE, so that's where the opportunities and dichotomy is, or conversely, the patience lies. So you have to know what type of investor are you, and the timeline that you are looking at.

VBs here know that I work on a "Asset - Business - Structure" framework. The business may be throwing out these cash but you also have to look at the different asset "class" or "segment" ROIC returns as well as how the major shareholders or management share the wealth with OPMI through the structure. Dividend yield is a result of that structure to OPMI.

(20-05-2016, 09:32 AM)BlueKelah Wrote:

(20-05-2016, 08:58 AM)TUBInvesting Wrote: Hi,

Just like the view of VBs here...

I am sure some of you will have a checklist. I have 1 too. But recently, I am considering enhancing it.

I am considering changing "Price to Average Earning Over 5 years" to "Price to Average FCF Over 5 Years". The rational is that FCF will grow cash portion in Balance sheet and take out all non-cash items in the income statement.

So just wondering does any of you uses P/FCF for calculation if the stock price is undervalued? If yes, possible to advise how it impact your views/stock selection?

Furthermore, I understand FCF has many ways to calculate. Just wondering if this is true, FCF=Net Cash from operating activities - Net Cap ex?

Thank you.

http://tubinvesting.blogspot.sg/

Unless you do over 10 years or longer period, the 5 years may catch the peak of business cycle and things look good. Then when you buy at peak, business cycle might turnaround and you may sell after holding 5 years at the cycle bottom, consoling yourself by saying you sold due to "change in fundamentals"

IMHO both metrics are not the true essence of value investing.

The only thing i use price for is to compare the 10 year highs and lows to have a guide how low it can go and the other is for calculating the dividend yield, which will use price and average payouts for past 5-10 years

Thanks for the reply. 

I used 10years previously. But since last year there I changed to 5 years, but I reduced my target PE, so it is harder to pass the criteria.

Hope this explains.

(20-05-2016, 11:54 AM)specuvestor Wrote: Simple ratios are filters. And we should always remember it is just a filter that doesn't take away more detailed analysis. Otherwise like I always say, my secondary school girl can also invest professionally

That said I think P/FCF (including WC) is a much better metric than PE from a businessman point of view. Earnings can be affected by too many accounting adjustments, while operating cash is more realistic. But then again Mr Market is usually more obsessed with PE, so that's where the opportunities and dichotomy is, or conversely, the patience lies. So you have to know what type of investor are you, and the timeline that you are looking at.

VBs here know that I work on a "Asset - Business - Structure" framework. The business may be throwing out these cash but you also have to look at the different asset "class" or "segment" ROIC returns as well as how the major shareholders or management share the wealth with OPMI through the structure. Dividend yield is a result of that structure to OPMI.

Totally agree with you.

But I will say these checklist for me is to pass the initial phase. After that, I will look at business angle too...

I have experimented with such line of thinking and failed miserably. The difficulty in such metrics is that using a singly year financial ratio, you may be over valuing using Peak Earnings.

Similarly, on the SGX, valuing some companies over a ten year period is hard as well. This is because some companies products may be a hit or that due to new competition/climate, it is difficult for the company to replicate what it has achieved in the past 10 years for the next 10 years ( e.g. Creative/Hyflux and possibly SMRT)

i have come to the conclusion that when investing, we have to do qualitative analysis a lot. If numbers could be used as many here have said, it will be secondary school work. Hence, its either we think very hard in what to invest (active) or just buy an index ETF (passive)

(22-05-2016, 12:38 PM)CY09 Wrote: I have experimented with such line of thinking and failed miserably. The difficulty in such metrics is that using a singly year financial ratio, you may be over valuing using Peak Earnings.

Similarly, on the SGX, valuing some companies over a ten year period is hard as well. This is because some companies products may be a hit or that due to new competition/climate, it is difficult for the company to replicate what it has achieved in the past 10 years for the next 10 years ( e.g. Creative/Hyflux and possibly SMRT)

i have come to the conclusion that when investing, we have to do qualitative analysis a lot. If numbers could be used as many here have said, it will be secondary school work. Hence, its either we think very hard in what to invest (active) or just buy an index ETF (passive)

CY09, I agree with the qualitative analysis part.
This is something I realise after 9 yrs of active investing.
The quantitative part is great, is necessary, but is also relatively easy with low barriers to entry.
Everyone can do that.
To gain a competitive edge and be successful, one will need to do the difficult part of qualitatively analysing and being right, or at least early, where others were wrong or have yet to gained that foresight.



https://thumbtackinvestor.wordpress.com/

My view is quantitative analysis helps you see where the company is lacking behind.

Although I will say looking at the business qualitatively is VERY Important (something I learn the last 2 years), but to me, if you do quantitative analysis on a stock before you invest, you will have increase your probability in choosing a good stock to invest in. Then a qualitative approach will bring you closer to a gain.

For the experience VBs here, I will say you should already have a fixed way to invest in and by staying consistent, you will gain eventually.

Fundamental/quantitative analysis will be more for people who are still rather new in Investing.

Just another note is that, even in quantitative analysis, everyone is different. So there will still be gains (not huge, but still gains) to be made when you do quantitative analysis.

http://tubinvesting.blogspot.sg/