Is JB Hi-Fi Limited (ASX:JBH) A Cash Cow?
Two important questions to ask before you buy JB Hi-Fi Limited (ASX:JBH) is, how it makes money and how it spends its cash. 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 JBH’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 JB Hi-Fi
What is JB Hi-Fi’s cash yield?
Free cash flow (FCF) is the amount of cash JB Hi-Fi 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.
There are two methods I will use to evaluate the quality of JB Hi-Fi’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
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
JB Hi-Fi’s yield of 6.78% last year indicates its ability to produce cash at the same rate as the market index, taking into account the company’s size. However, given that the risk for holding single-stock JB Hi-Fi is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
What’s the cash flow outlook for JB Hi-Fi?
Can JBH 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 couple of years, the company is expected to grow its cash from operations at a low single-digit rate of 2.2%, increasing from its current levels of AU$292m to AU$299m in three years’ time. Although this seems relatively robust, breaking down into year-on-year growth rates, JBH’s operating cash flow growth is expected to decline from a rate of 2.0% in the upcoming year, to 1.2% by the end of the third year. However, the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
The yield you receive on JB Hi-Fi is in-line with that of holding the broader market index. But if you factor in the higher risk of holding just JB Hi-Fi compared to the well-diversified market index, the stock doesn’t seem as appealing. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I recommend you continue to research JB Hi-Fi to get a more holistic view of the company by looking at:
Valuation: What is JBH 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 JBH 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 JB Hi-Fi’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.
