Two important questions to ask before you buy Chemtrade Logistics Income Fund (TSE:CHE.UN) 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. I’ve analysed below, the health and outlook of Chemtrade Logistics Income Fund’s cash flow, which will help you understand the stock from a cash standpoint. Cash is an important concept to grasp as an investor, as it directly impacts the value of your shares and the future growth potential of your portfolio.
View our latest analysis for Chemtrade Logistics Income Fund
What is free cash flow?
Free cash flow (FCF) is the amount of cash Chemtrade Logistics Income Fund 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 Chemtrade Logistics Income Fund’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, Chemtrade Logistics Income Fund generate sufficient cash from its operational activities, its FCF yield of 6.11% 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.
Is Chemtrade Logistics Income Fund's yield sustainable?
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 Chemtrade Logistics Income Fund’s expected operating cash flows. In the next couple of years, Chemtrade Logistics Income Fund’s operating cash flows is expected to grow by a double-digit 49.3%, which is encouraging, should capital expenditure levels maintain at an appropriate level. Below is a table of Chemtrade Logistics Income Fund’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) | CA$194.7m | CA$244.0m | CA$290.7m |
| OCF Growth Year-On-Year | 25.4% | 19.1% | |
| OCF Growth From Current Year | 49.3% |
Next Steps:
The yield you receive on Chemtrade Logistics Income Fund is in-line with that of holding the broader market index. However, if you factor in the higher risk of holding just Chemtrade Logistics Income Fund compared to the well-diversified market index, the stock doesn’t seem as appealing. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I suggest you continue to research Chemtrade Logistics Income Fund to get a more holistic view of the company by looking at:
- Valuation: What is CHE.UN 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 CHE.UN 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 Chemtrade Logistics Income Fund’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.
Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
About TSX:CHE.UN
Chemtrade Logistics Income Fund
Offers industrial chemicals and services in Canada, the United States, and South America.
Very undervalued slight.
