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Are QinetiQ Group plc (LON:QQ.) Shareholders Getting A Good Deal?

If you are currently a shareholder in QinetiQ Group plc (LON:QQ.), 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. Today we will examine QQ.’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.

Check out our latest analysis for QinetiQ Group

What is QinetiQ Group’s cash yield?

QinetiQ 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 QinetiQ Group to continue to grow, or at least, maintain its current operations.

The two ways to assess whether QinetiQ Group’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

Along with a positive operating cash flow, QinetiQ Group also generates a positive free cash flow. However, the yield of 3.57% is not sufficient to compensate for the level of risk investors are taking on. This is because QinetiQ Group’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.

LSE:QQ. Net Worth October 3rd 18

Is QinetiQ Group’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 QQ.’s expected operating cash flows. In the next couple of years, the company is expected to grow its cash from operations at a double-digit rate of 21%, ramping up from its current levels of UK£117m to UK£141m in three years’ time. Furthermore, breaking down growth into a year on year basis, QQ. is able to increase its growth rate each year, from -3.6% in the upcoming year, to 5.6% by the end of the third year. The overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.

Next Steps:

Given a low free cash flow yield, on the basis of cash, QinetiQ Group becomes a less appealing investment. 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. Now you know to keep cash flows in mind, You should continue to research QinetiQ Group to get a more holistic view of the company by looking at:

  1. Valuation: What is QQ. 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 QQ. is currently mispriced by the market.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on QinetiQ Group’s board and the CEO’s back ground.
  3. 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.