Something Interesting in Financial Video January 2015 - page 4
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Price/Cash Flow Ratio: Everything You Need to Know About It
1. Cash Flow is a measure of how much cash the company is gaining or losing. Some see it as a more honest, or pure, measure of profitability than earnings.
2. There are two types of cash flow measures that are commonly used: operating cash flow and free cash flow. Operating cash flow measures cash from operations; free cash flow measures cash from operations minus cash spent for new equipment. Free cash flow a more strict measure; basically, it attempts to calculate how much money is leftover for shareholders after all business-related cash expenditures are accounted for.
Mathematically, the calculations are as follows:
Free Cash Flow = Revenue - Operating Expenses - Cost of Goods Sold + Depreciation - Taxes - Change in Working Capital - Capital Expenditures
- It earned $40 in sales
- The cost of cups, lemons, and sugar are the cost of goods sold; for the month, they equaled $8
- Suppose they need to pay for lights and chairs. These are operating expenses, as they are not related to the cost of goods sold, but they are related to running the business. Suppose they spend $12 on such expenses.
- In total, they have $20 worth of sales in which they have not yet recieved payment (they have extended credit to customers). They do not owe anyone any money. Last month, they owed $4 and had $10 worth of payments that were due from customers.
- They are growing and are investing in a new lemonade stand across the street. To get the sign, they spent $10.
The FCF calculation for this business for its past month is as follows: 40 - 8 - 12 - (20 - 6) - 10 = -4The (20-6) is the change in working capital, which is basically (in our simplified model) the change short-term receivables - short-term payables.Since they paid debt this month, they sent cash out, and since they had more sales on credit, those sales need to be subtracted from the revenue (since they have not received cash for them yet; when cash is sent for them, that will be recorded as a favorable change in working capital and cash flow measurements). This example illustrates how a business with growing sales and reasonably low operating costs may still have negative cash flow. Such instances may not be a problem if the business can collect payments for sales easily and has cash on hand, but for value investors, understanding the details can help greatly in formulating an opinion on the company.
3. To calculate the the price/cash flow ratio, we can simply divided the market capitalization by the operating cash flow or the free cash flow -- whichever we are attempting to calculate.
4. As is the case with the price/earnings ratio, inverting price/cash flow ratios -- so viewing them that as cash flow/price ratios -- allows us to measure how much we as investors are paying for future cash flows relative to how much we would be paying for other yields -- namely bonds. This lets us create a framework by which we can evaluate how much we are getting compensated for the risk we are taking by investing in the company.
5. Generally speaking, a lower price/cash flow ratio is indicative of a stock that is “on sale.” However, companies with dim prospects for growth may also be given low price/cash flow ratios.
6. Price to free cash flow ratio could have some predictive value. From 1995 to 2014 in US markets, stocks in the top 20% of price/free cash flow ratio significantly outperformed the S&P 500 (some other conditions were added to shift the focus to larger stocks).
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newdigital, 2015.01.20 08:14
Trading Video: Monetary Policy Speculation Heats EURUSD Early this Week (based on dailyfx article)
Though the ECB rate decision is still days away and the Fed meeting is more than a week out, policy speculation is generating heavy seas in the FX market. Between the steady rise in capital market activity levels and an increase in the frequency of outlier events these past months, investors across asset classes are growing more sensitive to their exposure should sentiment suffer a more systemic collapse. Moving forward, the Euro, Dollar, risk theme and Chinese GDP are items to keep a close eye on. We discuss these tides' influence on the market in today's Trading Video.
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newdigital, 2015.01.20 20:47
NZD/USD 0.7600 Support at Risk on Dismal 4Q New Zealand CPI (based on dailyfx article)
USD/CAD Extends Higher on Surprise Rate Cut
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newdigital, 2015.01.24 14:10
GBPUSD Fundamentals (based on dailyfx article)
Fundamental Forecast for GBP: Neutral
A negative surprise from the Bank of England helped push the British Pound lower for the sixth-consecutive week versus the US Dollar. Extremely stretched price action raises the risk of a short-term bounce, but what could reasonably force the Sterling higher?
The seemingly-unstoppable US Dollar clearly remains in control against major counterparts, and the British Pound is no exception. UK economic event risk will be relatively limited in the week ahead and offers little hope of a news-driven GBP reversal. Instead traders will likely remain focused on a highly-anticipated US Federal Open Market Committee (FOMC) policy decision on the 28th. Any surprises could have far-reaching effects across FX and broader financial markets.
Unprecedented Quantitative Easing from the ECB, negative interest rates from the SNB, and expectations of unchanged monetary policy from the Bank of England makes the US FOMC stand out from the crowd. Unlike its G10 counterparts, markets expect the US Federal Reserve could soon raise interest rates. The key divergence helps explain why the US Dollar has significantly outperformed most major currencies through recent price action, but the risk of a sharp Dollar correction is especially high.
A disappointing US Federal Reserve decision could force a substantial Dollar pullback, and we believe the British Pound could outperform on such a USD correction. UK economic fundamentals and interest rate expectations may be relatively lackluster in the absolute sense. Yet relative to the likes of the Euro, Swiss Franc, and other majors, we believe the Sterling stands to do well absent further deterioration in domestic inflation figures.
Traders should use limited leverage ahead of what promises to be an important FOMC decision in the days ahead. Reversal risk is high as positioning data shows large traders are heavily long the US Dollar. It may take little to force a significant correction.Forum on trading, automated trading systems and testing trading strategies
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newdigital, 2015.01.24 17:48
Nikkei forecast for the week of January 26, 2015, Technical Analysis
The Nikkei as you can see rose during the course of the week, using the ¥17,000 level as a bit of a springboard. It appears that we continue to consolidate, and therefore we anticipate that the Nikkei will rise to the ¥18,000 level next. Once we break above there, we feel that the Nikkei will then go to the ¥20,000 level, but it will of course take some time. Ultimately, we believe the pullbacks are buying opportunities as the Bank of Japan continues its ultra-loose monetary policy. With that, we are buyers only.
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newdigital, 2015.01.24 17:51
DAX forecast for the week of January 26, 2015, Technical Analysis
The DAX as you can see broke higher during the course of the week, and is now completely broken out above the resistance at the €10,100 area. With that being the case, we feel that the DAX can be bought on pullbacks now, and should continue to go much higher than, possibly as high as €12,000 over the course of the next several weeks. With that, we are bullish but recognize that there may be a little bit of volatility simply because we have gone straight off. No plans whatsoever to sell.
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newdigital, 2015.01.24 17:54
NASDAQ forecast for the week of January 26, 2015, Technical Analysis
The NASDAQ as you can see broke higher during the course of the week, but did not manage to break above the 4800 level yet. This is an area that needs to be cleared in order for us to serve buying from a longer-term perspective, but we do anticipate that will happen. If we can get above 4800, we don’t see any reason whatsoever why the market will then head to the 5000 level. Pullbacks should continue to be buying opportunities as we believe that the 4600 level below is massively supportive.
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newdigital, 2015.01.24 17:58
S&P 500 forecast for the week of January 26, 2015, Technical Analysis
S&P 500 fell initially during the course of the week but found enough support near the 2000 level to turn things back around and smash into the 2060 level. That’s an area that has little bit of resistance, but ultimately we believe that if we get above there the market should then head towards the 2100 level. The market is most certainly in an uptrend, so we have no interest in selling anyway. Pullbacks should offer buying opportunities but you may have to look at shorter-term charts in order to find the correct candles.
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newdigital, 2015.01.24 18:04
Silver forecast for the week of January 26, 2015, Technical Analysis
The silver markets broke higher during the course of the week as you can see, clearing the $18 level. That of course was an area of resistance, so it makes sense that we would continue to go little bit higher. However, the $19 level above is resistive as well, so we could get a little bit of a pullback. This has been a rather strong move higher and we believe that there is quite a bit of bullish pressure underneath, so we look at pullbacks as potential buying opportunities. However, this is a market that might be easier if we trade off of the shorter-term charts.