Yahoo Finance Elegant Hotels Group Plc (LON:EHG): The Yield That Matters The Most
Elegant Hotels Group Plc (LON:EHG) shareholders, and potential investors, need to understand how much cash the business makes from its core operational activities, as well as how much is invested back into the business. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. I will take you through EHG’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.
Check out our latest analysis for Elegant Hotels Group
What is Elegant Hotels Group’s cash yield?
Free cash flow (FCF) is the amount of cash Elegant Hotels Group 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 Elegant Hotels Group’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, Elegant Hotels Group also generates a positive free cash flow. However, the yield of 4.85% is not sufficient to compensate for the level of risk investors are taking on. This is because Elegant Hotels Group’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
What’s the cash flow outlook for Elegant Hotels Group?
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 EHG’s expected operating cash flows. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 59%, ramping up from its current levels of US$14m to US$22m in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, EHG’s operating cash flow growth is expected to decline from a rate of 49% in the upcoming year, to 3.2% by the end of the third year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
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 suggest you continue to research Elegant Hotels Group to get a more holistic view of the company by looking at:
Valuation: What is EHG 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 EHG 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 Elegant Hotels 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.
