Compagnie Plastic Omnium SA (EPA:POM): Cash Is King
Two important questions to ask before you buy Compagnie Plastic Omnium SA (EPA:POM) is, how it makes money and how it spends its cash. This difference directly flows down to how much the stock is worth. Operating in the auto parts and equipment industry, POM is currently valued at €3.5b. I will take you through POM’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 Compagnie Plastic Omnium
What is Compagnie Plastic Omnium’s cash yield?
Compagnie Plastic Omnium 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.
I will be analysing Compagnie Plastic Omnium’s FCF by looking at its FCF yield and its operating cash flow growth. The yield will tell us whether the stock is generating enough cash to compensate for the risk investors take on by holding a single stock, which I will compare to the market index. The growth will proxy for sustainability levels of this cash generation.
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
The business reinvests all its cash profits as well as borrows more money, to maintain and grow the company. This leads to a negative FCF, as well as negative FCF yield, in which case is not a very useful measure.
Is Compagnie Plastic Omnium’s yield sustainable?
Compagnie Plastic Omnium’s FCF may be negative today, but is operating cash flows expected to improve in the future? Let’s examine the cash flow trend the company is anticipated to produce over time. Over the next few years, the company is expected to grow its cash from operations at a double-digit rate of 19%, ramping up from its current levels of €715m to €850m in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, POM’s operating cash flow growth is expected to decline from a rate of 11% next year, to 6.9% in the following year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
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 Compagnie Plastic Omnium to get a better picture of the company by looking at:
Valuation: What is POM 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 POM 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 Compagnie Plastic Omnium’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.
