If you are currently a shareholder in Elis SA (EPA:ELIS), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. I will take you through ELIS’s cash flow health and the risk-return concept based on the stock’s cash flow yield, using the most recent financial data. This will help you think about the company from a cash perspective, which is a crucial factor to investing.
View our latest analysis for Elis
What is Elis’s cash yield?
Free cash flow (FCF) is the amount of cash Elis 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.
There are two methods I will use to evaluate the quality of Elis’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
Along with a positive operating cash flow, Elis also generates a positive free cash flow. However, the yield of 0.081% is not sufficient to compensate for the level of risk investors are taking on. This is because Elis’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Is Elis’s yield sustainable?
Can ELIS 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 50.5%, ramping up from its current levels of €609.8m to €917.9m in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, ELIS’s operating cash flow growth is expected to decline from a rate of 41.4% next year, to 6.5% in the following year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
Although its positive operating cash flow, and high future growth, is appealing, the low free cash flow yield is unattractive. This is because you would be better compensated in terms of cash yield, by investing in the market index, as well as take on lower diversification risk. However, cash is only one aspect of investing. Now you know to keep cash flows in mind, I suggest you continue to research Elis to get a more holistic view of the company by looking at: