Should You Care About TOD'S S.p.A.’s (BIT:TOD) Cash Levels?

Two important questions to ask before you buy TOD'S S.p.A. (BIT:TOD) is, how it makes money and how it spends its cash. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. I’ve analysed below, the health and outlook of TOD'S’s cash flow, which will help you understand the stock from a cash standpoint. Cash is an important concept to grasp as an investor, as it directly impacts the value of your shares and the future growth potential of your portfolio.

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Is TOD'S generating enough cash?

TOD'S 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.

There are two methods I will use to evaluate the quality of TOD'S’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.

Along with a positive operating cash flow, TOD'S also generates a positive free cash flow. However, the yield of 2.21% is not sufficient to compensate for the level of risk investors are taking on. This is because TOD'S’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.

What’s the cash flow outlook for TOD'S?

Can TOD'S improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. In the next couple of years, TOD'S’s operating cash flows is expected to grow by a double-digit 55%, which is encouraging, should capital expenditure levels maintain at an appropriate level. Below is a table of TOD'S’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)	€74m	€106m	€116m
OCF Growth Year-On-Year		43%	8.7%
OCF Growth From Current Year			55%

Next Steps:

Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto TOD'S relative to a well-diversified market index. However, the high growth in operating cash flow may change the tides in the future. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I suggest you continue to research TOD'S to get a more holistic view of the company by looking at:

1. Valuation: What is TOD 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 TOD 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 TOD'S’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.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.