If you are currently a shareholder in Apple Inc. (NASDAQ:AAPL), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. 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 Apple’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.
Is Apple generating enough cash?
Apple’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 Apple to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of Apple’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
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
Although, Apple generate sufficient cash from its operational activities, its FCF yield of 6.44% is roughly in-line with the broader market’s high single-digit yield. This means investors are being compensated at the same level as they would be if they just held the well-diversified market index.
What’s the cash flow outlook for Apple?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 Apple’s expected operating cash flows. In the next couple of years, Apple’s operating cash flows is expected to grow by 5.0%, which is encouraging, should capital expenditure levels maintain at an appropriate level. Below is a table of Apple’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$77b||US$75b||US$75b||US$81b|
|OCF Growth Year-On-Year||-3.3%||0.4%||8.2%|
|OCF Growth From Current Year||-2.9%||5.0%|
Apple’s free cash flow yield suggests you are not being compensated over and above the market index, although you are taking on more risk investing in a single stock. In addition to this, its negative operating cash flow growth outlook is unappealing. 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 Apple to get a more holistic view of the company by looking at:
- Valuation: What is AAPL 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 AAPL 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 Apple’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.