Yahoo Finance Polypipe Group plc’s (LON:PLP) Most Important Factor To Consider
If you are currently a shareholder in Polypipe Group plc (LON:PLP), 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 will take you through PLP’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.
See our latest analysis for Polypipe Group
Is Polypipe Group generating enough cash?
Polypipe 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 Polypipe Group to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of Polypipe 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
Although, Polypipe Group generate sufficient cash from its operational activities, its FCF yield of 5.13% 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.
Does Polypipe Group 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 PLP’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 17%, ramping up from its current levels of UK£71m to UK£82m in two years’ time. Furthermore, breaking down growth into a year on year basis, PLP is able to increase its growth rate each year, from 6.2% next year, to 10.0% in the following year. The overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
High operating cash flow growth is a positive indication for Polypipe Group’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! Now you know to keep cash flows in mind, I recommend you continue to research Polypipe Group to get a more holistic view of the company by looking at:
Valuation: What is PLP 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 PLP 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 Polypipe 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.
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.