Two important questions to ask before you buy Polypipe Group plc (LON:PLP) 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 Polypipe Group’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.
View our latest analysis for Polypipe Group
What is free cash flow?
Polypipe Group’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 Polypipe Group to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of Polypipe Group’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
Although, Polypipe Group generate sufficient cash from its operational activities, its FCF yield of 5.13% 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.
Is Polypipe Group’s yield sustainable?
Can Polypipe Group improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. In the next couple of years, a double-digit growth in operating cash of 17% is expected. The future seems buoyant if Polypipe Group can maintain its levels of capital expenditure as well. Below is a table of Polypipe Group’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) | UK£71m | UK£75m | UK£82m |
| OCF Growth Year-On-Year | 6.2% | 10.0% | |
| OCF Growth From Current Year | 17% |
Next Steps:
High operating cash flow growth is a positive indication for Polypipe Group’s future, which means it may be able to sustain the current cash yield. However, if you factor in the higher risk of holding just Polypipe Group compared to the well-diversified market index, the stock doesn’t seem as appealing. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I recommend you continue to research Polypipe Group to get a more holistic view of the company by looking at:
- Valuation: What is PLP 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 PLP 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 Polypipe Group’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 editorial-team@simplywallst.com.