If you are currently a shareholder in Bumitama Agri Ltd (SGX:P8Z), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. 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 P8Z’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 free cash flow?
Bumitama Agri’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 Bumitama Agri to continue to grow, or at least, maintain its current operations.
I will be analysing Bumitama Agri’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
In Bumitama Agri’s case, its strong FCF yield of 34.1% over the past year means it sufficiently compensates investors for the risk they are taking on by investing in the stock, as opposed to merely investing in the well-diversified market index.
What’s the cash flow outlook for Bumitama Agri?
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 P8Z’s expected operating cash flows. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 34%, ramping up from its current levels of Rp1.6t to Rp2.2t in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, P8Z’s operating cash flow growth is expected to decline from a rate of 26% next year, to 6.4% in the following year. But the overall future outlook seems buoyant if P8Z can maintain its levels of capital expenditure as well.
Bumitama Agri provides an attractive cash yield above the market, as well as a strong future cash flow outlook, which reinforces the impression that it is a strong investment case. 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 Bumitama Agri to get a better picture of the company by looking at:
- Valuation: What is P8Z 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 P8Z 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 Bumitama Agri’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 firstname.lastname@example.org.