Earnings to FCF in pictures

Before I start to drill down into how a market ECC can be used to translate company FCF yields (operating) into growth ratings, I thought a few parting shots at the PE merchants was in order. If you’re seriously trying to explain equity valuations on the basis of reported earnings please consider the following 7 charts relating to the broader market (FT Allshare).

FT Allshare PE multiple was progressively de-rated from 2000-2008

Despite an acceleration in relative earnings growth (vs GDP) over the same period

How much of this acceleration was a function of increased financial leverage however?

Which saw debt as a % of EV more than double

More of this earnings meanwhile was being absorbed by additional investment

Which reduced to conversion of earnings into FCF

Which presents a somewhat less rosy picture on current valuations

Source: Thomson Reuters (Worldscope)