Two important questions to ask before you buy Lindab International AB (STO:LIAB) 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, Lindab International is currently valued at kr6.2b. Today we will examine Lindab International’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?
Lindab International’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 Lindab International to continue to grow, or at least, maintain its current operations.
I will be analysing Lindab International’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, Lindab International generate sufficient cash from its operational activities, its FCF yield of 6.65% 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.
Does Lindab International have a favourable cash flow trend?Can Lindab International 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. Over the next three years, Lindab International’s operating cash flows is expected to grow by a double-digit 19%, which is encouraging, should capital expenditure levels maintain at an appropriate level. Below is a table of Lindab International’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)||kr593m||kr627m||kr686m||kr708m|
|OCF Growth Year-On-Year||5.8%||9.3%||3.2%|
|OCF Growth From Current Year||16%||19%|
Lindab International is compensating investors at a cash yield similar to the wider market portfolio. But, in saying this, investors are taking on more risk by buying one single stock as opposed to a diversified market portfolio, but they are being compensated at the same level. Not the best deal! Now you know to keep cash flows in mind, I recommend you continue to research Lindab International to get a better picture of the company by looking at:
- Valuation: What is LIAB 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 LIAB 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 Lindab International’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.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.