Alright, google finance talk. You will see and hear from analyst the current P/E ratio for a stock. The P/E, or price to earnings ratio, compares the current stock price to the most recent determination of net income (without any adjustments).
Okay so net income. A number that is heavily affected by certain non-business income and expenses is being used to determine if I should invest. Doesn't make sense to me. Remember net income includes: loss/ gain on sale of assets, impairment costs, bonuses paid, non-recurring revenue and expenses. So really, net income is not a very good determinate of future or current earnings of a company.
If you really want to look for a good proxy of cash flow. If you want to be like an investment banker, well then EBITDA is what you should be looking at. EBITDA, earnings before interest, taxes, depreciation and amortization) is utilized as it removes the affect of certain capital structures (debt) and non-cash items (depreciation and amortization) and actually items below operating earnings. So ....a better proxy for cash flow.
If you are hell bent on needing a price multiple to determine whether to invest look at the Company's enterprise value to EBITDA and compare versus comparable companies.
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