Sky and Space Global Limited (ASX:SAS) 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 Sky andce Global’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 Sky andce Global
What is free cash flow?Sky andce Global generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short. There are two methods I will use to evaluate the quality of Sky andce Global’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
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
Sky andce Global’s yield of 1.66% 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 Sky andce Global but are not being adequately rewarded for doing so.
Does Sky andce Global have a favourable cash flow trend?Does Sky andce Global’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 upcoming year, Sky andce Global is expected to deliver a decline in operating cash flow compared to the most recent level, which is not an encouraging sign. Below is a table of the company’s operating cash flow in the past year, as well as the anticipated level going forward.
|Operating Cash Flow (OCF)||A$-3 M||A$-6M|
|OCF Growth Year-On-Year||74.56%|
What this means for you:
Are you a shareholder? The company’s low yield relative to the market index means you are taking on more risk holding the single-stock Sky andce Global as opposed to the diversified market portfolio, and also being compensated for less. Moreover, the stock’s negative growth prospects in terms of cash flow, seems worrisome. I recommend you revisit its investment case and examine whether anything fundamental has changed. If so, consider if it worth holding onto Sky andce Global as an investment.
Are you a potential investor? Four words – low yield, negative growth. Sky andce Global doesn’t jump out to me as an exciting new investment for you. 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! However, this one aspect of Sky andce Global doesn’t determine whether it will be a good investment. I strongly recommend delving deeper into its fundamentals, such as its earnings track record as well as its intrinsic value, before you make a final decision on the stock.
Interested in learning more about Sky andce Global’s fundamentals? To quickly understand whether it is a good investment for you, scroll through our FREE easy-to-understand infographics report. Not interested in Sky andce Global anymore? How about checking out hidden opportunities in high-growth and undervalued stocks here.