Why should cash flow be used for stock valuation over earnings per share?
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Cash flow is a more pure reading of exactly how the business is doing.  EPS can have a lot of other factors that are variable from quarter to quarter, such as one time charges or different tax rates.
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The company and a consensus of analysts have forecasted the earnings of the company out 12 months and divide it by the current price. Many people tend to use the Forward PE because it is a better indicator of where the company may go rather than where the company has been. \n\nFor example, a drug company may start selling a potential blockbuster drug next year. On this news the stock explodes, but since the company will not realized any profit until next year the current PE seems more expenses. Therefore we use the forward PE.
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Accounting information such as a companies set of accounts is useful to the shareholder and prospective shareholder.\n\nThey can use the info to make informed decisions on whether to invest in the company or not.\n\nThere will also be information from auditors of companies. They will state whethet they feel the accounts are true and fair.
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I don't know the industry-specific, but generally small businesses go for 2-3 x cash flow. The smaller the business, the lower the multiplier generally speaking. Of course if there is real estate involved that will increase the price, but you should normalize it to what it would be as an expense in terms of monthly payment and then recalculate your Net Cash Flow and the price accordingly.\n\nwww.dnainvestments.com
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It definitely has to do with the total valuation of a company which is figured by multiplying the umber of outstanding shares by the share price.  There are small-cap, mid-cap, and large cap stocks.  You have probably only heard of large-cap stocks like Cisco and Microsoft.  However, small cap stocks make up a huge portion of the stock market.
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Valuing a stock involves "real" information about the company and its prospective/potential earnings, in particular in relation to similar companies.\n\nValuation of a call option doesn't require any of this information.  It is done using a mathematical model.  The information that goes into this model is: stock price, dividend dates and a guess at what dividend payouts will be, an interest corresponding to a fixed deposit out to the expiration date of the option, and also a guess as to the "volatility" of the stock.  The volatility is a measure of how much the stock price swings around.  The more volatile the stock is, the higher the option price.\n\nSo the two valuation processes are very, very different.  One involves fundamental analysis of the company's earnings and the other is a "derivative" of the company stock price and other market parameters.
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When a company's revenues exceeds its expenses the company has a profit. All profits are reported to shareholders, financial institutions (those insituions who have an interest in the company) and others owners (owners who hold debt like bonds and debentures) on the companies Income Statement.  Now the company has two options to decide what to do with those profits. The company can decide to distribute those  profits to its shareholders, or they can keep them. They usually make this decsion at the company's annual meeting. The shareholders are the real owners of the company - when a company is started the shareholders give the company cash (so the company has an asset and the ability to "sartup") and in turn the shareholders get shares - pieces of paper representing ownerhsip - the ownership they have is represeted on the balance sheet called owners equity. \nWhen a company makes a profit and when those profits are kept them they are called retained earnings. Retained earnings are used to pay off old debt, other expenses etc. When a company gives its profits to shareholders they are called dividends. Certain shares have more rights when it comes to getting the dividens (ie preferred shareholders get their dividends before common shareholders). \nOnly  when a company maximizes is profits does it maxmimise the amount of those profits that it can pay to its shareholders. Makes sense because if you don't make any profit - because your expenses are more then your revenues then you really can't pay shareholders anyting. \nOne final thing, the more profit your company makes the more you can pay out to your sharholders - the higher payout = a higher dividend and shares with higher dividends are the most valued by investors (that is why those shares are so expensive).  So share price is related to coprorate profits as well.
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First step is to list all the events that cause a cash inflow or cash outflow.  Then make sure the list is in chronological order (earliest event first, then the next, all the way through to the last).  Make sure that the events are truely cash related: for example if the entity incurs a liability on 1 August, receives an invoice on 31 August, and pays the invoice on 14 September - the cash outflow only occurs on 14 September.\n\nHow can this be used to structure the analysis?  It can be very helpful to see exactly when capital providers (shareholders or creditors) need to provide funds, and exactly when they can expect to receive funds.  It can also help to determine whether the company has enough cash on hand to meet its needs - sometimes a company can be profitable on paper but not have enough liquid cash to meet its needs.\n\nThis sounds like part of a homework question you are having trouble with.  If you are looking for additional accounting based examples, the case study below is a great example of a company with liquidity issues.
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The brokerage house is recommending the stock carry more "weight" or value in your portfolio, or in their own portfolio. Most people that own stock, own more than one company. The weighting is a sort of asset allocation between the different stocks within your portfolio.\n\nOne hundred shares of IBM at $80/share, and one hundred shares of Microsoft at $23/share, have different values. So if we own both and are to "overweight" Microsoft in our portfolio over IBM, we will have to buy four times as many shares or more than IBM to follow the recommendation, or sell some of our IBM shares, whichever you prefer.
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Retained earnings and depreciation are accounting figures and do not represent cash flows.  Retained earnings itself cannot generate cash, neither can depreciation.\n\nOn a balance sheet, retained earnings is an accumlative figure representing the amount of income retained (or lost) by a business in each year of its existance.  It does not represent cash balances.  In fact, when preparing a cash flow statement you ignore it completely\n\nDepreciation is an attempt to ensure annual accounts, inparticular the annual profit figure, show a fair figure for profit in that year.\n\nFor example if you were a farmer who had\nincome of £10,000\nand\ncosts of £5,000 you would make a\nprofit of £5,000.\n\nHowever if bought a tractor in one year which cost £10,000 which would last for 10 years.  You would make a loss of £5,000 in one year and profit in the next 9 when the cost of the tractor was actually helping you make that profit.  Is this a fair way of showing profit?  Nope no really.\n\nThe international accounting standards require that you spread the cost of the tractor out across the years that you will get benefit from the tractor (say £10,000 divided by 10 years = £1,000 per year).  This means you would make a profit of £4,000 rather than a loss.  Much fairer.\n\nYou can calculate the cash flow (which can be negative and positive) in a particular year by starting with retained earnings in that year and adding back in the depreciation charge for the year and any other non-cash adjustments (such as provisions) and taking off any increase of Inventories, adding in any decrease in Inventories, taking off any decrease in trade creditors, adding in any increase in trade creditors and taking off any increase in debtors and adding in any decrease in debtors.  This is a very simplistic view and you would do well to look at an example.\n\nTry searching the net for How to prepare a cash flow statement using the indirect method.
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Pros:\n* Best monitor of a business's profitability.\n* More information than the cash method and a greater focus on outputs.\n* Better quality of management and decision making.\n* Greater comparability of management performance results.\n* Cost of capital assets are spread over the useful life of these assets.\n* More effective and reliable assessment of the financial health of the organization.\n* Shows how an organization has financed its activities and met its cash requirements.\n* Allows users to evaluation the organization's ability to finance its activities and meet its liabilities and commitments.\n\nCons:\n* Developing accounting policies.\n* No set or defined standards regarding siginficant accrual accounts (revenues, accounts payables, accounts receivable).\n* Identifying and valuing existing assets.\n* Establishing accounting systems.\n* Developing the necessary skills and providing training for both the preparers and users of financial information.\n* Significant cost to implement.\n* The cash method is comparatively simple and objective.\n* It requires greater professional judgement (i.e. estimates for uncollectible accounts receivable, depreciation, etc.)
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The main choice is Discounted Cash Flow versus Internal Rate of Return.\n\nSome authors have a preference for one versus the other.\n\nUnder normal circumstances they produce the same answer; however, under unusual circumstances they produce different answers.  IRR requires that you be able to solve n-th degree polynomials, which can often be approximated with software like EXCEL.  IRR also produces multiple solutions, some of which need to be discarded as unrealistic.
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In risky investments, the earlier positive cash flow should be weighted more.  But in a NPV calculation, as long as NPVs are the same between two investments, they are considered equal.  One investment might promise some small inflow in the beginning years, another investment might promise a lump sum payout at the end of the entire duration.
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I think you are looking for the P/E.  Divide the price of the stock by earnings per share.  You'll get the same answer if you divide the market value of the company by the total earnings (rather than EPS).  \n\nMarket value / EPS doesn't make sense.
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The stock has done extremely well but it is not clear why. It is way overvalued by most measures and I would not hold it at this point. If you're concerned about selling too low, then you might set a stop-loss, which means if it keeps going up, the value of your stock will keep going up, but if when it drops significantly from the top your shares will sell.\n\nBest of success.
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This is more complicated than can a short answer will allow but here's a start:\n\nThe method used in reporting cash flows will be apparent from the top and bottom lines.  If the top line is net income, and everything adds to net income, then they are using indirect.  If the top portion has changes in net working capital (change in receivables, change in cash, change in payables) then the firm is using direct.\n\nThe 10-K will ideally have multiple years' data, but that doesn't always happen.  However, you can look up the 10-K for the same quarter prior year for comparison purposes.  From there get comparative net income and operating cash flows.
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In theory, a stock's price should be equal to the present value of all of its future cash flows.  Anything that causes the cash flows to get bigger or smaller has an effect on price.  But given that cash flows don't change, the price can still change if the interest rate changes.\n\nLet's look at an example.  Suppose that you have a company that has paid all of its bills for the next year.  In one year, it gets a $100,000,000 payment for sure.  At that time, the payment will be distributed to all owners of the firm & the firm will disolve.  How much is the firm worth?  We know it will be worth $100MM in a year.  What is the right interest rate.  Suppose is it 10%.  Can we find the value of the firm now?  Sure -- it is the amount that if we invest it at 10% it will be worth $100MM in a year.  That is, it is worth $100MM/1.1 or $90,909,090.91 now.  \n\nOK -- what happens if interest rates change.  Perhaps they go up to 11%.  Then the value of our firm changes to $100MM/1.11 = $90,090,090.09 -- losing almost $82K in value.  If rates go down, the value should go up.\n\nNext, let's look at CPI.  This is the rate of inflation.  If it increases, people will think that they need more money to have the same lifestyle in the future.  If they are worried about inflation, they will demand a higher interest rate to compensate them for higher prices in the future.  So, changes in expected inflation change the interest rates, and therfore change stock prices.\n\nWhat about the economic growth rate?  If the economy grows faster than expected, then maybe that $100MM that we thought the company was going to get will be higher.  A higher payment translates into higher stock prices.\n\nAs for employment, it turns out that the employment rate is associated with growth.  If a lot of companies are hiring, then there will be more money spent by the new employees, and there will be more produced by those new employees, so demand for goods goes up.  This causes an increase in the expected profits, and higher stock prices.  It isn't quite so simple, though.  If there are too many people working, then the demand for labor causes higher costs and lower profits, which causes stock prices to decline.