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Amadeus IT Group, S.A. (BME:AMS) 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. Today we will examine AMS’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.
What is free cash flow?
Amadeus IT 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 Amadeus IT Group to continue to grow, or at least, maintain its current operations.
The two ways to assess whether Amadeus IT 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, Amadeus IT Group also generates a positive free cash flow. However, the yield of 3.06% is not sufficient to compensate for the level of risk investors are taking on. This is because Amadeus IT 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 Amadeus IT 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 AMS’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 24%, ramping up from its current levels of €1.7b to €2.1b in three years’ time. Furthermore, breaking down growth into a year on year basis, AMS is able to increase its growth rate each year, from 4.9% in the upcoming year, to 6.3% by the end of the third year. The overall future outlook seems buoyant if AMS can maintain its levels of capital expenditure as well.
The company’s low yield relative to the market index means you are taking on more risk holding the single-stock Amadeus IT Group 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 Amadeus IT Group to get a more holistic view of the company by looking at:
- Valuation: What is AMS 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 AMS 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 Amadeus IT 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.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.