Most analysts prefer using price to free cash flow rather than price-to-earnings (P/E) ratio because price to free cash flow is ____.
A) easier to compute
B) more accurate than cash flow per share
C) a stricter measure that reduces the cash flow by the amount of capital expenditures
D) more reliable as a measure of performance

Question

Quizplus · Accepted Answer

Price to free cash flow is a stricter measure that reduces cash flow by the amount of capital expenditures, giving a more accurate reflection of a company's ability to generate cash after accounting for necessary investments in fixed assets. This makes it a more reliable measure of performance than the P/E ratio, which can be influenced by accounting practices and non-cash items. While price to free cash flow may be slightly more difficult to compute than P/E, the increased accuracy and reliability make it a preferred metric among analysts.

Most Analysts Prefer Using Price to Free Cash Flow Rather