Spotless Group Holdings Limited (ASX:SPO) 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. This difference directly flows down to how much the stock is worth. Operating in the diversified support services industry, Spotless Group Holdings is currently valued at AU$1.27B. Today we will examine Spotless Group Holdings’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 Spotless Group Holdings
Is Spotless Group Holdings generating enough cash?Free cash flow (FCF) is the amount of cash Spotless Group Holdings 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 Spotless Group Holdings’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, Spotless Group Holdings generate sufficient cash from its operational activities, its FCF yield of 9.64% 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 Spotless Group Holdings have a favourable cash flow trend?Does Spotless Group Holdings’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. In the next couple of years, expected growth for Spotless Group Holdings’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 Spotless Group Holdings’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)||A$191M||A$191M||A$194M||A$168M|
|OCF Growth Year-On-Year||0.0021%||1.57%||-13.37%|
|OCF Growth From Current Year||1.78%||-11.82%|
Spotless Group Holdings is compensating investors at a cash yield similar to the wider market portfolio, but holding the stock on its own is riskier than investing in the diversified market, which means the yield is not that attractive on a risk-return basis. Furthermore, its declining operating cash flow doesn’t add to the investment case. Now you know to keep cash flows in mind, You should continue to research Spotless Group Holdings to get a better picture of the company by looking at:
- 1. Valuation: What is SPO 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 SPO is currently mispriced by the market.
- 2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Spotless Group Holdings’s board and the CEO’s back ground.
- 3. 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.