Two important questions to ask before you buy LatAm Autos Limited (ASX:LAA) is, how it makes money and how it spends its cash. 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 LatAm Autos’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.
What is free cash flow?
LatAm Autos’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 LatAm Autos to continue to grow, or at least, maintain its current operations.
The two ways to assess whether LatAm Autos’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
After accounting for capital expenses required to run the business, LatAm Autos is not able to generate positive FCF, leading to a negative FCF yield – not very useful for interpretation!
What’s the cash flow outlook for LatAm Autos?Can LatAm Autos improve its operating cash production in the future? Let’s take a quick look at the cash flow trend LatAm Autos is expected to deliver over time. Over the next three years, expected growth for LatAm Autos’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 LatAm Autos’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$6.7m||-AU$4.1m||-AU$1.1m||AU$3.3m|
|OCF Growth Year-On-Year||-39%||-73%||-397%|
|OCF Growth From Current Year||-84%||-149%|
Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. You should continue to research LatAm Autos to get a better picture of the company by looking at:
- Valuation: What is LAA 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 LAA 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 LatAm Autos’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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.