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Two important questions to ask before you buy Lincoln Electric Holdings Inc (NASDAQ:LECO) is, how it makes money and how it spends its cash. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. Today we will examine LECO’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you.
Check out our latest analysis for Lincoln Electric Holdings
What is free cash flow?
Lincoln Electric Holdings’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for Lincoln Electric Holdings to continue to grow, or at least, maintain its current operations.
The two ways to assess whether Lincoln Electric Holdings’s FCF is sufficient, is to compare the FCF yield to the market index yield, as well as determine whether the top-line operating cash flows will continue to grow.
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
Lincoln Electric Holdings’s yield of 2.54% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on Lincoln Electric Holdings but are not being adequately rewarded for doing so.
What’s the cash flow outlook for Lincoln Electric Holdings?
Can LECO 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. Over the next couple years, the company is expected to grow its cash from operations at a double-digit rate of 48.1%, ramping up from its current levels of US$306.7m to US$454.2m in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, LECO’s operating cash flow growth is expected to decline from a rate of 16.5% in the upcoming year, to 7.5% by the end of the third year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
The company’s low yield relative to the market index means you are taking on more risk holding the single-stock Lincoln Electric Holdings as opposed to the diversified market portfolio, and being compensated for less. Though the high operating cash flow growth in the future could change this. Now you know to keep cash flows in mind, You should continue to research Lincoln Electric Holdings to get a more holistic view of the company by looking at: