Do You Know CVS Group plc’s (LON:CVSG) Cash Situation?

Two important questions to ask before you buy CVS Group plc (LON:CVSG) 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 industry, CVS Group is currently valued at UK£465m. Today we will examine CVS Group’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 CVS Group

Is CVS Group generating enough cash?

CVS Group 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 CVS Group’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

Along with a positive operating cash flow, CVS Group also generates a positive free cash flow. However, the yield of 4.68% is not sufficient to compensate for the level of risk investors are taking on. This is because CVS Group’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.

AIM:CVSG Net Worth January 7th 19
AIM:CVSG Net Worth January 7th 19

Does CVS Group have a favourable cash flow trend?

Does CVS Group’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. Over the next three years, a double-digit growth in operating cash of 40% is expected. The future seems buoyant if CVS Group can maintain its levels of capital expenditure as well. Below is a table of CVS Group’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£37m UK£49m UK£50m UK£52m
OCF Growth Year-On-Year 31% 1.4% 5.6%
OCF Growth From Current Year 33% 40%

Next Steps:

The company’s low yield relative to the market index means you are taking on more risk holding the single-stock CVS Group as opposed to the diversified market portfolio, and being compensated for less. Though the high operating cash flow growth in the future could change this. Now you know to keep cash flows in mind, I suggest you continue to research CVS Group to get a more holistic view of the company by looking at:

  1. Valuation: What is CVSG 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 CVSG 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 CVS Group’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.

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.