Two important questions to ask before you buy La-Z-Boy Incorporated (NYSE:LZB) 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, La-Z-Boy is currently valued at US$1.4b. I’ve analysed below, the health and outlook of La-Z-Boy’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 La-Z-Boy generating enough cash?
La-Z-Boy’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 La-Z-Boy to continue to grow, or at least, maintain its current operations.
The two ways to assess whether La-Z-Boy’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
La-Z-Boy’s yield of 5.58% 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 La-Z-Boy is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
Is La-Z-Boy’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 La-Z-Boy’s expected operating cash flows. In the next few years, a double-digit growth in operating cash of 55% is expected. The future seems buoyant if La-Z-Boy can maintain its levels of capital expenditure as well. Below is a table of La-Z-Boy’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)||US$111m||US$130m||US$153m||US$171m|
|OCF Growth Year-On-Year||17%||18%||12%|
|OCF Growth From Current Year||39%||55%|
La-Z-Boy 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! 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 La-Z-Boy to get a more holistic view of the company by looking at:
- Valuation: What is LZB 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 LZB 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 La-Z-Boy’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 firstname.lastname@example.org.