Software Aktiengesellschaft’s (ETR:SOW) Most Important Factor To Consider

If you are currently a shareholder in Software Aktiengesellschaft (ETR:SOW), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. I’ve analysed below, the health and outlook of Software’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.

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What is Software’s cash yield?

Software’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 Software to continue to grow, or at least, maintain its current operations.

I will be analysing Software’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, Software generate sufficient cash from its operational activities, its FCF yield of 7.47% 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.

XTRA:SOW Net Worth January 14th 19
XTRA:SOW Net Worth January 14th 19

What’s the cash flow outlook for Software?

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 Software’s expected operating cash flows. In the next couple of years, Software’s operating cash flows is expected to grow by a double-digit 16%, which is encouraging, should capital expenditure levels maintain at an appropriate level. Below is a table of Software’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) €177m €195m €206m
OCF Growth Year-On-Year 10.0% 5.7%
OCF Growth From Current Year 16%

Next Steps:

Software is compensating investors at a cash yield similar to the wider market portfolio. However, you are taking on more risk by holding a single-stock rather than the well-diversified market index. This means, in terms of risk and return, it’s not the best deal. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. You should continue to research Software to get a better picture of the company by looking at:

  1. Valuation: What is SOW 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 SOW is currently mispriced by the market.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Software’s board and the CEO’s back ground.
  3. 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.