Yahoo Finance Inchcape plc (LON:INCH): How Much Money Comes Back To Investors?
Two important questions to ask before you buy Inchcape plc (LON:INCH) 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 distributors industry, INCH is currently valued at UK£2.78b. I will take you through INCH’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 Inchcape
What is free cash flow?
Inchcape’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 Inchcape to continue to grow, or at least, maintain its current operations.
I will be analysing Inchcape’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, Inchcape also generates a positive free cash flow. However, the yield of 2.57% is not sufficient to compensate for the level of risk investors are taking on. This is because Inchcape’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Does Inchcape have a favourable cash flow trend?
Does INCH’s future look brighter in terms of its ability to generate higher operating cash flows? This can be estimated by examining the trend of the company’s operating cash flow moving forward. In the next few years, the company is expected to grow its cash from operations at a single-digit rate of 6.9%, increasing from its current levels of UK£345.6m to UK£369.4m in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, INCH’s operating cash flow growth is expected to decline from a rate of 3.6% in next year, to 3.2% in the following year. But the overall future outlook seems buoyant if INCH can maintain its levels of capital expenditure as well.
Next Steps:
The company’s low yield relative to the market index means you are taking on more risk holding the single-stock Inchcape as opposed to the diversified market portfolio, and being compensated for less. Though the high operating cash flow growth in the future could change this. Now you know to keep cash flows in mind, You should continue to research Inchcape to get a better picture of the company by looking at:
Valuation: What is INCH 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 INCH 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 Inchcape’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.
