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Two important questions to ask before you buy Tieto Oyj (HEL:TIETO) 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 TIETO’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.
View our latest analysis for Tieto Oyj
Is Tieto Oyj generating enough cash?
Free cash flow (FCF) is the amount of cash Tieto Oyj has left after it pays off its expenses, including its net capital expenditures, which is what the company needs to spend each year to maintain or grow its business operations.
The two ways to assess whether Tieto Oyj’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
Although, Tieto Oyj generate sufficient cash from its operational activities, its FCF yield of 5.56% 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 Tieto Oyj have a favourable cash flow trend?
Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at TIETO’s expected operating cash flows. Over the next couple years, the company is expected to grow its cash from operations at a double-digit rate of 15%, ramping up from its current levels of €159m to €183m in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, TIETO’s operating cash flow growth is expected to decline from a rate of 8.7% in the upcoming year, to 5.5% by the end of the third year. But the overall future outlook seems buoyant if TIETO can maintain its levels of capital expenditure as well.
Next Steps:
High operating cash flow growth is a positive indication for Tieto Oyj’s future, which means it may be able to sustain the current cash yield. But, in saying this, investors are taking on more risk by buying one single stock as opposed to a diversified market portfolio, but they are being compensated at the same level. Not the best deal! Now you know to keep cash flows in mind, You should continue to research Tieto Oyj to get a more holistic view of the company by looking at: