Yahoo Finance Is Devro plc (LON:DVO) A Cash Cow?
Two important questions to ask before you buy Devro plc (LON:DVO) 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. Today we will examine DVO’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you.
See our latest analysis for Devro
What is free cash flow?
Devro’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 Devro to continue to grow, or at least, maintain its current operations.
The two ways to assess whether Devro’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
Although, Devro generate sufficient cash from its operational activities, its FCF yield of 5.05% 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.
Is Devro’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 DVO’s expected operating cash flows. Over the next few years, the company is expected to grow its cash from operations at a double-digit rate of 80%, ramping up from its current levels of UK£32m to UK£58m in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, DVO’s operating cash flow growth is expected to decline from a rate of 49% next year, to 21% in the following year. But the overall future outlook seems buoyant if DVO can maintain its levels of capital expenditure as well.
Next Steps:
High operating cash flow growth is a positive indication for Devro’s future, which means it may be able to sustain the current cash yield. But, in saying this, investors are taking on more risk by buying one single stock as opposed to a diversified market portfolio, but they are being compensated at the same level. Not the best deal! 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 Devro to get a more holistic view of the company by looking at:
Valuation: What is DVO 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 DVO 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 Devro’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 editorial-team@simplywallst.com.
