Two important questions to ask before you buy Whitbread PLC (LON:WTB) 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. Today we will examine Whitbread’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.
Check out our latest analysis for Whitbread
What is Whitbread’s cash yield?
Free cash flow (FCF) is the amount of cash Whitbread 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 Whitbread’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
Whitbread’s yield of 1.9% 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 Whitbread but are not being adequately rewarded for doing so.
Does Whitbread have a favourable cash flow trend?
Does Whitbread’s future look brighter in terms of its ability to generate higher operating cash flows? This can be estimated by examining the trend of the company’s operating cash flow moving forward. In the next couple of years, a double-digit growth in operating cash of 28.43% is expected. The future seems buoyant if Whitbread can maintain its levels of capital expenditure as well. Below is a table of Whitbread’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) | UK£621.00m | UK£693.90m | UK£773.28m | UK£797.55m |
| OCF Growth Year-On-Year | 11.74% | 11.44% | 3.14% | |
| OCF Growth From Current Year | 24.52% | 28.43% |
Next Steps:
Given a low free cash flow yield, on the basis of cash, Whitbread 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. 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 Whitbread to get a better picture of the company by looking at:
- Valuation: What is WTB 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 WTB 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 Whitbread’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.