Question #39

First, note that computing "cash flow" as net income plus non-cash charges is suboptimal and should not be trusted; especially if a superior metric such as price-to- FCFE is present. Therefore, despite the fact, Nunca has a lower price-to-cash flow ratio; this is unlikely to be a reason to invest, especially as it is in contradiction to the superior price-to- FCFE ratio. Controlling for risk (i.e., companies have the same beta), we note that Nunca has a higher five-year estimated growth rate but also higher P/FCFE multiple. The company is therefore not necessarily either under or overvalued relative to its competitor (based on the limited information presented in the table), but it is certainly trading at a premium (i.e., trading at a higher multiple) due to its higher growth forecast.