Yahoo Finance Greene King plc (LON:GNK): How Much Money Comes Back To Investors?
Two important questions to ask before you buy Greene King plc (LON:GNK) 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. I’ve analysed below, the health and outlook of GNK’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.
Check out our latest analysis for Greene King
What is Greene King’s cash yield?
Free cash flow (FCF) is the amount of cash Greene King 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.
There are two methods I will use to evaluate the quality of Greene King’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
Along with a positive operating cash flow, Greene King also generates a positive free cash flow. However, the yield of 1.28% is not sufficient to compensate for the level of risk investors are taking on. This is because Greene King’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Does Greene King have a favourable cash flow trend?
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 GNK’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 14%, ramping up from its current levels of UK£266m to UK£304m in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, GNK’s operating cash flow growth is expected to decline from a rate of 9.7% in the upcoming year, to 3.1% by the end of the third year. But the overall future outlook seems buoyant if GNK can maintain its levels of capital expenditure as well.
Next Steps:
Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto Greene King relative to a well-diversified market index. However, the high growth in operating cash flow may change the tides in the future. 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 Greene King to get a more holistic view of the company by looking at:
Valuation: What is GNK 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 GNK 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 Greene King’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.
