Two important questions to ask before you buy Accenture plc (NYSE:ACN) 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 Accenture’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 free cash flow?
Free cash flow (FCF) is the amount of cash Accenture 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 Accenture’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
Along with a positive operating cash flow, Accenture also generates a positive free cash flow. However, the yield of 4.92% is not sufficient to compensate for the level of risk investors are taking on. This is because Accenture’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Is Accenture’s yield sustainable?Does Accenture’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 double-digit growth in operating cash of 19% is expected. The future seems buoyant if Accenture can maintain its levels of capital expenditure as well. Below is a table of Accenture’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$6.0b||US$6.2b||US$6.7b||US$7.2b|
|OCF Growth Year-On-Year||2.3%||8.1%||7.9%|
|OCF Growth From Current Year||11%||19%|
Although its positive operating cash flow, and high future growth, is appealing, the low free cash flow yield is unattractive. 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 Accenture to get a more holistic view of the company by looking at:
- Valuation: What is ACN 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 ACN 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 Accenture’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.