Two important questions to ask before you buy Fiat Chrysler Automobiles N.V. (BIT:FCA) 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. I will take you through Fiat Chrysler Automobiles’s cash flow health and the risk-return concept based on the stock’s cash flow yield, using the most recent financial data. This will help you think about the company from a cash perspective, which is a crucial factor to investing.
See our latest analysis for Fiat Chrysler Automobiles
What is free cash flow?
Free cash flow (FCF) is the amount of cash Fiat Chrysler Automobiles 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.
The two ways to assess whether Fiat Chrysler Automobiles’s FCF is sufficient, is to compare the FCF yield to the market index yield, as well as determine whether the top-line operating cash flows will continue to grow.
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
In Fiat Chrysler Automobiles’s case, its strong FCF yield of 11.55% over the past year means it sufficiently compensates investors for the risk they are taking on by investing in the stock, as opposed to merely investing in the well-diversified market index.
What’s the cash flow outlook for Fiat Chrysler Automobiles?
Does Fiat Chrysler Automobiles’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, Fiat Chrysler Automobiles’s operating cash flows is expected to grow by a double-digit 18%, which is encouraging, should capital expenditure levels maintain at an appropriate level. Below is a table of Fiat Chrysler Automobiles’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) | €9.9b | €10b | €11b | €12b |
| OCF Growth Year-On-Year | 2.6% | 12% | 3.1% | |
| OCF Growth From Current Year | 15% | 18% |
Next Steps:
The outcome of Fiat Chrysler Automobiles’s cash flow analysis is compelling. Its high potential lies in above-market cash yield as well as a strong cash flow growth outlook. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I recommend you continue to research Fiat Chrysler Automobiles to get a more holistic view of the company by looking at:
- Valuation: What is FCA 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 FCA 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 Fiat Chrysler Automobiles’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.
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.