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Ferrari N.V. (NYSE:RACE) 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. This difference directly flows down to how much the stock is worth. Operating in the industry, RACE is currently valued at US$26b. I will take you through RACE’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.
What is Ferrari's cash yield?
Free cash flow (FCF) is the amount of cash Ferrari has left after it pays off its expenses, including its net capital expenditures, which is what the company needs to spend each year to maintain or grow its business operations.
The two ways to assess whether Ferrari’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, Ferrari also generates a positive free cash flow. However, the yield of 1.72% is not sufficient to compensate for the level of risk investors are taking on. This is because Ferrari’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 Ferrari?
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 RACE’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 42%, ramping up from its current levels of €934m to €1.3b in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, RACE's operating cash flow growth is expected to decline from a rate of 17% in the upcoming year, to 11% by the end of the third year. But the overall future outlook seems buoyant if RACE can maintain its levels of capital expenditure as well.
Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto Ferrari relative to a well-diversified market index. However, the high growth in operating cash flow may change the tides in the future. 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 Ferrari to get a more holistic view of the company by looking at:
- Valuation: What is RACE 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 RACE 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 Ferrari’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 firstname.lastname@example.org. 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.