If you are currently a shareholder in Coca-Cola Amatil Limited (ASX:CCL), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. I will take you through CCL’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.
Is Coca-Cola Amatil generating enough cash?
Coca-Cola Amatil’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 Coca-Cola Amatil to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of Coca-Cola Amatil’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
Along with a positive operating cash flow, Coca-Cola Amatil also generates a positive free cash flow. However, the yield of 4.14% is not sufficient to compensate for the level of risk investors are taking on. This is because Coca-Cola Amatil’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Does Coca-Cola Amatil have a favourable cash flow trend?
Can CCL 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 single-digit rate of 8.9%, increasing from its current levels of AU$623m to AU$678m in three years’ time. Furthermore, breaking down growth into a year on year basis, CCL is able to increase its growth rate each year, from -0.9% in the upcoming year, to 3.4% by the end of the third year. The overall future outlook seems buoyant if CCL can maintain its levels of capital expenditure as well.
Although its positive operating cash flow, and high future growth, is appealing, the low free cash flow yield is unattractive. 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. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. You should continue to research Coca-Cola Amatil to get a more holistic view of the company by looking at:
- Valuation: What is CCL 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 CCL 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 Coca-Cola Amatil’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 email@example.com. 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.