Ashland Global Holdings Inc (NYSE:ASH) shareholders, and potential investors, need to understand how much cash the business makes from its core operational activities, as well as how much is invested back into the business. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. Today we will examine ASH’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. See our latest analysis for ASH
If ASH generating enough cash?Free cash flow (FCF) is the amount of cash ASH 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. I will be analysing ASH’s FCF by looking at its FCF yield and its operating cash flow growth. The yield will tell us whether the stock is generating enough cash to compensate for the risk investors take on by holding a single stock, which I will compare to the market index. The growth will proxy for sustainability levels of this cash generation.
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, ASH generate sufficient cash from its operational activities, its FCF yield of 6.01% 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.
What’s the cash flow outlook for ASH?Does ASH’s future look brighter in terms of its ability to generate higher operating cash flows? This can be estimated by examining the trend of the company’s operating cash flow moving forward. Over the next two years, expected growth for ASH’s operating cash is negative. This is unfavourable to its future outlook, especially if capital expenditure heads the opposite direction. Below is a table of ASH’s operating cash flow in the past year, as well as the anticipated level going forward.
|Current||+1 year||+2 year|
|Operating Cash Flow (OCF)||$495M||$427M||$468M|
|OCF Growth Year-On-Year||-13.70%||9.52%|
|OCF Growth From Current Year||-5.49%|
What this means for you:
Are you a shareholder? ASH’s average yield compared to the market index means you are taking on more risk holding the single-stock ASH as opposed to the diversified market portfolio. Furthermore, its declining operating cash flow doesn’t add to the investment case. Though, it is key to remember that cash is only one facet of investing, and if other fundamentals of ASH are attractive, then you may want to think about holding onto your shares.
Are you a potential investor? ASH’s free cash flow yield suggests you are not being compensated over and above the market index, although you are taking on more risk investing in a single stock. In addition to this, its negative operating cash flow growth outlook is unappealing. However, this should not deter you from digging deeper into the stock to build your own investment case based around its fundamentals such as its financial leverage and intrinsic valuation.
Interested in learning more about ASH’s fundamentals? To quickly understand whether it is a good investment for you, scroll through our FREE easy-to-understand infographics report. If you’re curious about other attractive investments, explore our list of high-growth and undervalued stocks here.