If you are currently a shareholder in EDAG Engineering Group AG (FRA:ED4), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. I will take you through EDAG Engineering Group’s cash flow health and the risk-return concept based on the stock’s cash flow yield, using the most recent financial data. This will help you think about the company from a cash perspective, which is a crucial factor to investing.
Is EDAG Engineering Group generating enough cash?
EDAG Engineering Group’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 EDAG Engineering Group to continue to grow, or at least, maintain its current operations.
The two ways to assess whether EDAG Engineering Group’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
Along with a positive operating cash flow, EDAG Engineering Group also generates a positive free cash flow. However, the yield of 4.05% is not sufficient to compensate for the level of risk investors are taking on. This is because EDAG Engineering Group’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
What’s the cash flow outlook for EDAG Engineering Group?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 EDAG Engineering Group’s expected operating cash flows. In the next couple of years, EDAG Engineering Group’s operating cash flows is expected to grow by a double-digit 37%, which is encouraging, should capital expenditure levels maintain at an appropriate level. Below is a table of EDAG Engineering Group’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)||€47m||€58m||€64m|
|OCF Growth Year-On-Year||23%||11%|
|OCF Growth From Current Year||37%|
The company’s low yield relative to the market index means you are taking on more risk holding the single-stock EDAG Engineering Group as opposed to the diversified market portfolio, and being compensated for less. Though the high operating cash flow growth in the future could change this. Now you know to keep cash flows in mind, I suggest you continue to research EDAG Engineering Group to get a more holistic view of the company by looking at:
- Valuation: What is ED4 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 ED4 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 EDAG Engineering Group’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 email@example.com. 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.