Two important questions to ask before you buy Chr Hansen Holding A/S (CPH:CHR) is, how it makes money and how it spends its cash. This difference directly flows down to how much the stock is worth. Operating in the specialty chemicals industry, CHR is currently valued at ø86.44b. Today we will examine CHR’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you.
What is Chr. Hansen Holding’s cash yield?
Chr. Hansen Holding’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 Chr. Hansen Holding to continue to grow, or at least, maintain its current operations.
I will be analysing Chr. Hansen Holding’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
Chr. Hansen Holding’s yield of 0.14% 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 Chr. Hansen Holding but are not being adequately rewarded for doing so.
Does Chr. Hansen Holding have a favourable cash flow trend?
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 CHR’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 47.5%, ramping up from its current levels of €271.3m to €400.2m in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, CHR’s operating cash flow growth is expected to decline from a rate of 16.1% in the upcoming year, to 14.9% by the end of the third year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Given a low free cash flow yield, on the basis of cash, Chr. Hansen Holding 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. 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 Chr. Hansen Holding to get a more holistic view of the company by looking at:
- Valuation: What is CHR 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 CHR 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 Chr. Hansen Holding’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.