Nanoco Group plc (LON:NANO) 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. This difference directly flows down to how much the stock is worth. Operating in the semiconductors industry, Nanoco Group is currently valued at UK£98m. Today we will examine Nanoco 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.
What is free cash flow?
Nanoco 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 Nanoco Group to continue to grow, or at least, maintain its current operations.
I will be analysing Nanoco 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
After accounting for capital expenses required to run the business, Nanoco Group is not able to generate positive FCF, leading to a negative FCF yield – not very useful for interpretation!
What’s the cash flow outlook for Nanoco Group?Does Nanoco 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 going forward. In the next couple of years, expected growth for Nanoco Group’s operating cash is negative. This is unfavourable to its future outlook, especially if capital expenditure heads the opposite direction. Below is a table of Nanoco 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£6m||-UK£5m||-UK£7m||-UK£4m|
|OCF Growth Year-On-Year||-23%||37%||-42%|
|OCF Growth From Current Year||5.1%||-39%|
Now you know to keep cash flows in mind, I suggest you continue to research Nanoco Group to get a more holistic view of the company by looking at:
- Valuation: What is NANO 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 NANO 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 Nanoco 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 firstname.lastname@example.org.