If you are currently a shareholder in Arkema SA (EPA:AKE), 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 AKE’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.
Is Arkema generating enough cash?
Arkema generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short.
The two ways to assess whether Arkema’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
Although, Arkema generate sufficient cash from its operational activities, its FCF yield of 5.08% 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.
Is Arkema’s yield sustainable?
Can AKE improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 27%, ramping up from its current levels of €961m to €1.2b in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, AKE’s operating cash flow growth is expected to decline from a rate of 10% in the upcoming year, to 8.7% by the end of the third year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
High operating cash flow growth is a positive indication for Arkema’s future, which means it may be able to sustain the current cash yield. However, you are taking on more risk by holding a single-stock rather than the well-diversified market index. This means, in terms of risk and return, it’s not the best deal. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. You should continue to research Arkema to get a more holistic view of the company by looking at:
- Valuation: What is AKE 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 AKE 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 Arkema’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 firstname.lastname@example.org.