Two important questions to ask before you buy Control4 Corporation (NASDAQ:CTRL) is, how it makes money and how it spends its cash. This difference directly flows down to how much the stock is worth. Operating in the industry, Control4 is currently valued at US$488m. I will take you through Control4’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 Control4 generating enough cash?
Control4 generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short.
There are two methods I will use to evaluate the quality of Control4’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
Control4’s yield of 5.62% 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 Control4 is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
Is Control4’s yield sustainable?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 Control4’s expected operating cash flows. Over the next three years, Control4’s operating cash flows is expected to grow by a double-digit 65%, which is encouraging, should capital expenditure levels maintain at an appropriate level. Below is a table of Control4’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$34m||US$40m||US$55m||US$56m|
|OCF Growth Year-On-Year||17%||37%||2.6%|
|OCF Growth From Current Year||61%||65%|
High operating cash flow growth is a positive indication for Control4’s future, which means it may be able to sustain the current cash yield. 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, I suggest you continue to research Control4 to get a better picture of the company by looking at:
- Valuation: What is CTRL 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 CTRL 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 Control4’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.