Cash Flows or Profitability Measures: Which are Better Stock Return Predictors?

Abstract

In this article, we examine the relative ability of cash flows and profitability measures to predict stock returns; whereas, the primary objective of this study is to identify which among the aforementioned predictors have a better stock prediction ability. For this purpose, we used five-year data (from 2014 to 2018) of 50 non-financial firms listed on the Pakistan Stock Exchange. We used cash flow from operations and cash flow after financing activities as cash flow measures and gross profit, operating profit, and earnings per share as profitability measures. The technique of panel regression was used in this study. We found that for stock return predictions, profitability measures provide better prediction results than cash flows.Keywords: cash flow from operations (CFO), cash flow after financing activities (CFAF), predictions, profitability, stock returns