Capital Markets: Observations & Insights

VI

More Than Meets the Eye Valuation

• The stock market looks cheaper on free cash flow than earnings

I

‒ Companies’ increasing reliance on intangible assets that are expensed rather than capitalized has depressed earnings relative to free cash flow

II

S&P 500 Valuation Relative to Past 25-Year Average

III

17%

IV

-2%

V

Price-to-Earnings

Price-to-Free Cash Flow

VI

Source: FactSet as of 12/31/2019. Note: Price-to-earnings is the current market price of a company divided by its last 12 months of earnings. Price-to-free cash flow is the current price of a company divided by its last 12 months of free cash flow.

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