Two important questions to ask before you buy Kesko Oyj (HEL:KESKOB) is, how it makes money and how it spends its cash. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. I will take you through Kesko Oyj’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.
What is free cash flow?
Kesko Oyj 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 Kesko Oyj’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
Kesko Oyj’s yield of 0.072% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on Kesko Oyj but are not being adequately rewarded for doing so.
What’s the cash flow outlook for Kesko Oyj?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 Kesko Oyj’s expected operating cash flows. Over the next three years, a double-digit growth in operating cash of 17.24% is expected. The future seems buoyant if Kesko Oyj can maintain its levels of capital expenditure as well. Below is a table of Kesko Oyj’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)||€393.70m||€442.70m||€425.30m||€461.57m|
|OCF Growth Year-On-Year||12.45%||-3.93%||8.53%|
|OCF Growth From Current Year||8.03%||17.24%|
Given a low free cash flow yield, on the basis of cash, Kesko Oyj becomes a less appealing investment. This is because you would be better compensated in terms of cash yield, by investing in the market index, as well as take on lower diversification risk. Now you know to keep cash flows in mind, I suggest you continue to research Kesko Oyj to get a more holistic view of the company by looking at:
- Valuation: What is KESKOB 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 KESKOB 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 Kesko Oyj’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 email@example.com.