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Two important questions to ask before you buy Frasers Commercial Trust (SGX:ND8U) is, how it makes money and how it spends its cash. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. I’ve analysed below, the health and outlook of ND8U’s cash flow, which will help you understand the stock from a cash standpoint. Cash is an important concept to grasp as an investor, as it directly impacts the value of your shares and the future growth potential of your portfolio.
What is free cash flow?
Frasers Commercial Trust’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 Frasers Commercial Trust to continue to grow, or at least, maintain its current operations.
I will be analysing Frasers Commercial Trust’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
Frasers Commercial Trust’s yield of 3.74% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on Frasers Commercial Trust but are not being adequately rewarded for doing so.
Does Frasers Commercial Trust have a favourable cash flow trend?
Can ND8U 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. Over the next few years, the company is expected to grow its cash from operations at a double-digit rate of 12%, ramping up from its current levels of S$83m to S$93m in two years’ time. Furthermore, breaking down growth into a year on year basis, ND8U is able to increase its growth rate each year, from -19% next year, to 37% in the following year. The overall future outlook seems buoyant if ND8U can maintain its levels of capital expenditure as well.
Given a low free cash flow yield, on the basis of cash, Frasers Commercial Trust becomes a less appealing investment. This is because you would be better compensated in terms of cash yield, by investing in the market index, as well as take on lower diversification risk. However, cash is only one aspect of investing. Now you know to keep cash flows in mind, You should continue to research Frasers Commercial Trust to get a better picture of the company by looking at:
- Valuation: What is ND8U 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 ND8U 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 Frasers Commercial Trust’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.