Yahoo Finance On the Beach Group plc (LON:OTB): How Much Money Comes Back To Investors?
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If you are currently a shareholder in On the Beach Group plc (LON:OTB), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. I’ve analysed below, the health and outlook of OTB’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.
See our latest analysis for On the Beach Group
Is On the Beach Group generating enough cash?
On the Beach Group’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 On the Beach Group to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of On the Beach Group’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
On the Beach Group’s yield of 4.57% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on On the Beach Group but are not being adequately rewarded for doing so.
Is On the Beach Group'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 OTB’s expected operating cash flows. In the next couple of years, the company is expected to grow its cash from operations at a double-digit rate of 79%, ramping up from its current levels of UK£26m to UK£47m in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, OTB's operating cash flow growth is expected to decline from a rate of 37% in the upcoming year, to 8.9% by the end of the third year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
Given a low free cash flow yield, on the basis of cash, On the Beach Group becomes a less appealing investment. 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 On the Beach Group to get a more holistic view of the company by looking at:
Valuation: What is OTB 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 OTB 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 On the Beach Group’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.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
