Qantm Intellectual Property Limited (ASX:QIP) 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. 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 Qantm Intellectual Property’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 Qantm Intellectual Property
What is Qantm Intellectual Property’s cash yield?
Free cash flow (FCF) is the amount of cash Qantm Intellectual Property 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 Qantm Intellectual Property’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
Qantm Intellectual Property’s yield of 4.72% 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 Qantm Intellectual Property but are not being adequately rewarded for doing so.
What’s the cash flow outlook for Qantm Intellectual Property?
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 Qantm Intellectual Property’s expected operating cash flows. In the next few years, a double-digit growth in operating cash of 65% is expected. The future seems buoyant if Qantm Intellectual Property can maintain its levels of capital expenditure as well. Below is a table of Qantm Intellectual Property’s operating cash flow in the past year, as well as the anticipated level going forward.| Current | +1 year | +2 year | +3 year | |
|---|---|---|---|---|
| Operating Cash Flow (OCF) | AU$11m | AU$15m | AU$17m | AU$19m |
| OCF Growth Year-On-Year | 28% | 17% | 11% | |
| OCF Growth From Current Year | 50% | 65% |
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. Now you know to keep cash flows in mind, I recommend you continue to research Qantm Intellectual Property to get a more holistic view of the company by looking at:
- Valuation: What is QIP worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether QIP is currently mispriced by the market.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Qantm Intellectual Property’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.