Two important questions to ask before you buy Flowers Foods, Inc. (NYSE:FLO) 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’ve analysed below, the health and outlook of Flowers Foods’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.
What is Flowers Foods’s cash yield?
Free cash flow (FCF) is the amount of cash Flowers Foods 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 Flowers Foods’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
Along with a positive operating cash flow, Flowers Foods also generates a positive free cash flow. However, the yield of 3.85% is not sufficient to compensate for the level of risk investors are taking on. This is because Flowers Foods’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Does Flowers Foods have a favourable cash flow trend?Can Flowers Foods 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, Flowers Foods’s operating cash flows is expected to grow by a double-digit 25%, which is encouraging, should capital expenditure levels maintain at an appropriate level. Below is a table of Flowers Foods’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$296m||US$336m||US$353m||US$370m|
|OCF Growth Year-On-Year||14%||4.9%||4.9%|
|OCF Growth From Current Year||19%||25%|
Given a low free cash flow yield, on the basis of cash, Flowers Foods becomes a less appealing investment. This is because you would be better compensated in terms of cash yield, by investing in the market index, as well as take on lower diversification risk. However, cash is only one aspect of investing. 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 Flowers Foods to get a better picture of the company by looking at:
- Valuation: What is FLO 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 FLO 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 Flowers Foods’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 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.