Two important questions to ask before you buy AAON, Inc. (NASDAQ:AAON) 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 AAON’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.
Is AAON generating enough cash?
AAON’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 AAON to continue to grow, or at least, maintain its current operations.
I will be analysing AAON’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.
Does AAON have a favourable cash flow trend?
Does AAON’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 going forward. Over the next few years, the company is expected to grow its cash from operations at a double-digit rate of 68%, ramping up from its current levels of US$60m to US$102m in two years’ time. Furthermore, breaking down growth into a year on year basis, AAON is able to increase its growth rate each year, from 29% next year, to 31% in the following year. The overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Now you know to keep cash flows in mind, You should continue to research AAON to get a better picture of the company by looking at:
- Valuation: What is AAON 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 AAON 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 AAON’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.
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