Two important questions to ask before you buy Teleste Corporation (HLSE:TLT1V) is, how it makes money and how it spends its cash. This difference directly flows down to how much the stock is worth. Operating in the communications equipment industry, Teleste is currently valued at €132.24M. Today we will examine Teleste’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you. See our latest analysis for Teleste
What is free cash flow?Free cash flow (FCF) is the amount of cash Teleste 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. There are two methods I will use to evaluate the quality of Teleste’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
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
Teleste’s yield of 13.4% last year indicates its ability to produce cash well-above the market index, given the size of the company. This means investors are adequately rewarded for the risk they take on by overweighting Teleste.
Does Teleste have a favourable cash flow trend?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 Teleste’s expected operating cash flows. In the next couple of years, Teleste is expected to deliver a decline in operating cash flow compared to the most recent level, which is not an encouraging sign. Below is a table of Teleste’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)||€22.06M||€12.76M||€15.85M||€15.11M|
|OCF Growth Year-On-Year||-42.15%||24.23%||-4.70%|
|OCF Growth From Current Year||-28.13%||-31.51%|
Teleste sufficiently rewards its shareholders in terms of its cash yield, however, its declining operating cash flow is worrisome. This trend raises questions around the sustainability of the stock’s yields. 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 Teleste to get a more holistic view of the company by looking at:
- Valuation: What is TLT1V 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 TLT1V 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 Teleste’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.