Do You Know Carnival plc’s (LON:CCL) Cash Situation?

Carnival plc (LON:CCL) shareholders, and potential investors, need to understand how much cash the business makes from its core operational activities, as well as how much is invested back into the business. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. I’ve analysed below, the health and outlook of Carnival’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.

See our latest analysis for Carnival

Is Carnival generating enough cash?

Carnival 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.

There are two methods I will use to evaluate the quality of Carnival’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, Carnival generate sufficient cash from its operational activities, its FCF yield of 5.35% 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.

LSE:CCL Balance Sheet Net Worth, March 5th 2019
LSE:CCL Balance Sheet Net Worth, March 5th 2019

What’s the cash flow outlook for Carnival?

Can Carnival 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, Carnival’s operating cash flows is expected to grow by a double-digit 32%, which is encouraging, should capital expenditure levels maintain at an appropriate level. Below is a table of Carnival’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) US$5.5b US$5.9b US$6.4b US$7.3b
OCF Growth Year-On-Year 6.2% 9.0% 14%
OCF Growth From Current Year 16% 32%

Next Steps:

The yield you receive on Carnival is in-line with that of holding the broader market index. However, if you factor in the higher risk of holding just Carnival compared to the well-diversified market index, the stock doesn’t seem as appealing. Now you know to keep cash flows in mind, You should continue to research Carnival to get a better picture of the company by looking at:

  1. Valuation: What is CCL 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 CCL is currently mispriced by the market.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Carnival’s board and the CEO’s back ground.
  3. 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 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.