Are American Public Education Inc (NASDAQ:APEI) Shareholders Getting A Good Deal?
If you are currently a shareholder in American Public Education Inc (NASDAQ:APEI), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. I will take you through APEI’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 American Public Education
What is free cash flow?
American Public Education’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 American Public Education to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of American Public Education’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
American Public Education’s yield of 9.35% last year indicates its ability to produce cash at the same rate as the market index, taking into account the company’s size. However, given that the risk for holding single-stock American Public Education is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
Is American Public Education’s yield sustainable?
Does APEI’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 couple of years, the company is expected to grow its cash from operations at a double-digit rate of 31%, ramping up from its current levels of US$44m to US$58m in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, APEI’s operating cash flow growth is expected to decline from a rate of 18% next year, to 11% in the following year. But the overall future outlook seems buoyant if APEI can maintain its levels of capital expenditure as well.
Next Steps:
American Public Education’s positive operating cash flow is encouraging, and its yield is relatively similar to the market index. 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! 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 American Public Education to get a better picture of the company by looking at:
Valuation: What is APEI 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 APEI 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 American Public Education’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.
