AcadeMedia AB (publ) (STO:ACAD) 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. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. I will take you through AcadeMedia’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.
Check out our latest analysis for AcadeMedia
What is free cash flow?
Free cash flow (FCF) is the amount of cash AcadeMedia 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.
I will be analysing AcadeMedia’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
AcadeMedia’s yield of 8.19% last year indicates its ability to produce cash at the same rate as the market index, taking into account the company’s size. However, given that the risk for holding single-stock AcadeMedia is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
Is AcadeMedia’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 AcadeMedia’s expected operating cash flows. In the next few years, AcadeMedia’s operating cash flows is expected to grow by a double-digit 15.58%, which is encouraging, should capital expenditure levels maintain at an appropriate level. Below is a table of AcadeMedia’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) | kr868.00m | kr792.24m | kr911.00m | kr1.00b |
| OCF Growth Year-On-Year | -8.73% | 14.99% | 10.13% | |
| OCF Growth From Current Year | 4.95% | 15.58% |
Next Steps:
High operating cash flow growth is a positive indication for AcadeMedia’s future, which means it may be able to sustain the current cash yield. 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! Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. You should continue to research AcadeMedia to get a more holistic view of the company by looking at:
- Valuation: What is ACAD 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 ACAD 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 AcadeMedia’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 editorial-team@simplywallst.com.