Two important questions to ask before you buy Capgemini SE (EPA:CAP) is, how it makes money and how it spends its cash. 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 Capgemini’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.
Check out our latest analysis for Capgemini
Is Capgemini generating enough cash?
Capgemini 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.
I will be analysing Capgemini’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
Capgemini’s yield of 5.94% 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 Capgemini is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
What’s the cash flow outlook for Capgemini?
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 Capgemini’s expected operating cash flows. Over the next three years, Capgemini’s operating cash flows is expected to grow by a double-digit 19%, which is encouraging, should capital expenditure levels maintain at an appropriate level. Below is a table of Capgemini’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) | €1.4b | €1.4b | €1.5b | €1.7b |
| OCF Growth Year-On-Year | 1.1% | 7.9% | 9.2% | |
| OCF Growth From Current Year | 9.1% | 19% |
Next Steps:
The yield you receive on Capgemini 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. Now you know to keep cash flows in mind, I recommend you continue to research Capgemini to get a more holistic view of the company by looking at:
- Valuation: What is CAP 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 CAP 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 Capgemini’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.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.