Roots Corporation (TSE:ROOT) 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 industry, Roots is currently valued at CA$194m. I’ve analysed below, the health and outlook of Roots’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 Roots
What is free cash flow?
Roots 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.
The two ways to assess whether Roots’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, Roots 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 Roots?
Can Roots improve its operating cash production in the future? Let’s take a quick look at the cash flow trend Roots is expected to deliver over time. In the next couple of years, Roots’s operating cash flows is expected to grow by a double-digit 88%, which is encouraging, should capital expenditure levels maintain at an appropriate level. Below is a table of Roots’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$22m | CA$32m | CA$42m |
| OCF Growth Year-On-Year | 46% | 29% | |
| OCF Growth From Current Year | 88% |
Next Steps:
Now you know to keep cash flows in mind, I suggest you continue to research Roots to get a more holistic view of the company by looking at:
- Valuation: What is ROOT 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 ROOT 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 Roots’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.