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Two important questions to ask before you buy LyondellBasell Industries N.V. (NYSE:LYB) 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 will take you through LyondellBasell Industries’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.
Is LyondellBasell Industries generating enough cash?
LyondellBasell Industries’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 LyondellBasell Industries to continue to grow, or at least, maintain its current operations.
The two ways to assess whether LyondellBasell Industries’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
LyondellBasell Industries’s yield of 5.92% 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 LyondellBasell Industries is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
Does LyondellBasell Industries have a favourable cash flow trend?Does LyondellBasell Industries’s future look brighter in terms of its ability to generate higher operating cash flows? This can be estimated by examining the trend of the company’s operating cash flow moving forward. Over the next three years, a growth of high single-digit 8.0% is somewhat optimistic, so long as capital expenditure doesn’t ramp up by even more. Below is a table of LyondellBasell Industries’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$5.7b||US$4.9b||US$6.2b||US$6.1b|
|OCF Growth Year-On-Year||-13%||24%||-0.6%|
|OCF Growth From Current Year||8.7%||8.0%|
Its positive operating cash flow is a good sign of disciplined operational efficiency, leading to a yield in-line to the market portfolio. But holding the stock on its own is riskier than investing in the diversified market, which means the yield is not that attractive on a risk-return basis. Now you know to keep cash flows in mind, You should continue to research LyondellBasell Industries to get a better picture of the company by looking at:
- Valuation: What is LYB 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 LYB 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 LyondellBasell Industries’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.