If you are currently a shareholder in Leon’s Furniture Limited (TSE:LNF), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. This difference directly flows down to how much the stock is worth. Operating in the industry, Leon’s Furniture is currently valued at CA$1.1b. Today we will examine Leon’s Furniture’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.
Is Leon’s Furniture generating enough cash?
Leon’s Furniture’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 Leon’s Furniture to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of Leon’s Furniture’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
Leon’s Furniture’s yield of 13.29% last year indicates its ability to produce cash well-above the market index, given the size of the company. This means investors are adequately rewarded for the risk they take on by overweighting Leon’s Furniture.
Is Leon’s Furniture’s yield sustainable?Can Leon’s Furniture improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. In the next couple of years, Leon’s Furniture 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 Leon’s Furniture’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$182m||CA$147m||CA$153m|
|OCF Growth Year-On-Year||-19%||4.1%|
|OCF Growth From Current Year||-16%|
Although Leon’s Furniture offers an above-average yield relative to the market index, its negative operating cash flow growth in the near-term is concerning, and makes us a cautious around the company’s future outlook. Now you know to keep cash flows in mind, I recommend you continue to research Leon’s Furniture to get a better picture of the company by looking at:
- Valuation: What is LNF 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 LNF 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 Leon’s Furniture’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.
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