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QuestionsCategory: Valuation QuadrantPrice to Cash Flow – BreadTalk
Wendy Tan asked 4 months ago
Hi Folks, Based on BreadTalk example in Price to Cash Flow topic, 
  1. was it first due to scenario of high consistent revenue/cash flow yet low earnings that led to further investigation of the cause of breadtalk's earning distortion? 
  2. its 3 year depreciation distorted the earnings. How was this discovered? Do we need to check each item (before Net Profit) against the industry average for abnormality? 
  3. "...Both the PEG ratio and the price-to-cash-flow ratio suggested we should buy the stock..." PEG ratio uses EPS growth rate. If the earnings is distorted, wouldnt the PEG ratio fail to reveal undervalued stock as well?
Happy Vesak Day! Thank you and appreciate your time! kind regards wendy
1 Answers
Victor Chng answered 4 months ago
Hi Wendy,  
  1. We spot it when comparing the cash flow and net profit. In most cases, the cash flow and net profit should be around the same, if not higher for cash flow. 
  2. We read through the footnotes and compare them with the listed competitors. 
  3. The earnings are distorted as the earnings are a lower figure compared to cash flow but not volatile. Breadtalk's earnings are still growing at that time, from $1m (2005) to $11m (2010).
  I hope this helps. Feel free to ask follow up questions. 
Wendy Tan replied 4 months ago

Thanks Victor for your explanation!

To clarify on point 3. I presume BreadTalk’s growth rate was much higher than industry average hence its PEG ratio among industry was still favorable despite higher P/E? How about adjusting the depreciation on a 5 year basis to reflect the actual earnings and P/E for a more absolute conclusion?


Victor Chng replied 4 months ago

Hi Wendy,

I don’t advise you to do that because that is not what the market perceives.

You should keep things simple by looking at the cash flow. You can compare its cash flow with its competitors since the depreciation had been added back.

Wendy Tan replied 4 months ago

Got it :) Thank you Victor as always!