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If you are currently a shareholder in ITV plc (LON:ITV), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. I’ve analysed below, the health and outlook of ITV’s cash flow, which will help you understand the stock from a cash standpoint. Cash is an important concept to grasp as an investor, as it directly impacts the value of your shares and the future growth potential of your portfolio.
See our latest analysis for ITV
What is free cash flow?
ITV generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short.
There are two methods I will use to evaluate the quality of ITV’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Although, ITV generate sufficient cash from its operational activities, its FCF yield of 6.66% is roughly in-line with the broader market’s high single-digit yield. This means investors are being compensated at the same level as they would be if they just held the well-diversified market index.
Does ITV have a favourable cash flow trend?
Can ITV improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. In the next couple of years, the company is expected to grow its cash from operations at a double-digit rate of 16.5%, ramping up from its current levels of UK£543.0m to UK£632.6m in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, ITV’s operating cash flow growth is expected to decline from a rate of 6.6% in the upcoming year, to 2.9% by the end of the third year. But the overall future outlook seems buoyant if ITV can maintain its levels of capital expenditure as well.
Next Steps:
ITV’s positive operating cash flow is encouraging, and its yield is relatively similar to the market index. But holding the stock on its own is riskier than investing in the diversified market, which means the yield is not that attractive on a risk-return basis. Now you know to keep cash flows in mind, You should continue to research ITV to get a more holistic view of the company by looking at: