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Zumiez Inc. (NASDAQ:ZUMZ) 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 Zumiez’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.
What is Zumiez’s cash yield?
Zumiez’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 Zumiez to continue to grow, or at least, maintain its current operations.
The two ways to assess whether Zumiez’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
In Zumiez’s case, its strong FCF yield of 11.17% over the past year means it sufficiently compensates investors for the risk they are taking on by investing in the stock, as opposed to merely investing in the well-diversified market index.
Does Zumiez have a favourable cash flow trend?Can Zumiez 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. In the next couple of years, a growth of high single-digit 7.4% is somewhat optimistic, so long as capital expenditure doesn’t ramp up by even more. Below is a table of Zumiez’s operating cash flow in the past year, as well as the anticipated level going forward.
|Current||+1 year||+2 year|
|Operating Cash Flow (OCF)||US$69m||US$72m||US$74m|
|OCF Growth Year-On-Year||4.3%||2.9%|
|OCF Growth From Current Year||7.4%|
Zumiez provides an attractive cash yield above the market, as well as a strong future cash flow outlook, which reinforces the impression that it is a strong investment case. Now you know to keep cash flows in mind, I suggest you continue to research Zumiez to get a better picture of the company by looking at:
- Valuation: What is ZUMZ 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 ZUMZ 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 Zumiez’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 email@example.com.