If you are currently a shareholder in Telefónica Deutschland Holding AG (FRA:O2D), 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, Telefónica Deutschland Holding is currently valued at €8.7b. I’ve analysed below, the health and outlook of Telefónica Deutschland Holding’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.
What is free cash flow?
Free cash flow (FCF) is the amount of cash Telefónica Deutschland Holding 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.
The two ways to assess whether Telefónica Deutschland Holding’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
Telefónica Deutschland Holding’s yield of 6.69% last year indicates its ability to produce cash at the same rate as the market index, taking into account the company’s size. However, given that the risk for holding single-stock Telefónica Deutschland Holding is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
What’s the cash flow outlook for Telefónica Deutschland Holding?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 Telefónica Deutschland Holding’s expected operating cash flows. In the next few years, Telefónica Deutschland Holding’s operating cash flows is expected to grow by a low 3.1%, which may be sufficient if capital expenditure levels are below this. Below is a table of Telefónica Deutschland Holding’s operating cash flow in the past year, as well as the anticipated level going forward.
|Current||+1 year||+2 year||+3 year|
|Operating Cash Flow (OCF)||€1.7b||€1.8b||€1.8b||€1.7b|
|OCF Growth Year-On-Year||4.6%||1.4%||-2.8%|
|OCF Growth From Current Year||6.1%||3.1%|
The yield you receive on Telefónica Deutschland Holding is in-line with that of holding the broader market index. 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. I suggest you continue to research Telefónica Deutschland Holding to get a better picture of the company by looking at:
- Valuation: What is O2D 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 O2D 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 Telefónica Deutschland Holding’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 firstname.lastname@example.org. 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.