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Two important questions to ask before you buy SalMar ASA (OB:SALM) 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 SALM’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 SalMar
What is free cash flow?
SalMar’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 SalMar to continue to grow, or at least, maintain its current operations.
The two ways to assess whether SalMar’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
SalMar’s yield of 3.41% 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 SalMar but are not being adequately rewarded for doing so.
Does SalMar 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 SALM’s expected operating cash flows. In the next couple of years, the company is expected to grow its cash from operations at a low single-digit rate of 4.51%, increasing from its current levels of øre3.27b to øre3.42b in three years’ time. Furthermore, breaking down growth into a year on year basis, SALM is able to increase its growth rate each year, from -5.33% in the upcoming year, to 5.01% by the end of the third year. The overall future outlook seems relatively optimistic if SALM can maintain its levels of capital expenditure as well.
Next Steps:
SalMar’s low free cash flow yield is deterring, in addition to its low growth prospects. This means that, as an investor, you would be rewarded less than just holding a portfolio made up of all the stocks in the market, as well as taking on higher risk! Now you know to keep cash flows in mind, I suggest you continue to research SalMar to get a more holistic view of the company by looking at: