Nasstar plc (LON:NASA): Exploring Free Cash Flows

Nasstar plc (LON:NASA) 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 internet software and services industry, Nasstar is currently valued at UK£67.48m. Today we will examine Nasstar’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.

View our latest analysis for Nasstar

What is free cash flow?

Nasstar’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 Nasstar to continue to grow, or at least, maintain its current operations.

I will be analysing Nasstar’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

Although, Nasstar generate sufficient cash from its operational activities, its FCF yield of 8.57% 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.

AIM:NASA Net Worth August 14th 18
AIM:NASA Net Worth August 14th 18

Is Nasstar’s yield sustainable?

Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at Nasstar’s expected operating cash flows. In the next couple of years, a double-digit growth in operating cash of 28.82% is expected. The future seems buoyant if Nasstar can maintain its levels of capital expenditure as well. Below is a table of Nasstar’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£6.06m UK£5.30m UK£7.80m
OCF Growth Year-On-Year -12.47% 47.17%
OCF Growth From Current Year 28.82%

Next Steps:

Nasstar is compensating investors at a cash yield similar to the wider market portfolio. However, if you factor in the higher risk of holding just Nasstar compared to the well-diversified market index, the stock doesn’t seem as appealing. Now you know to keep cash flows in mind, I suggest you continue to research Nasstar to get a better picture of the company by looking at:

  1. Valuation: What is NASA 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 NASA 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 Nasstar’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.