If you are currently a shareholder in Nokian Renkaat Oyj (HEL:NRE1V), 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’ve analysed below, the health and outlook of NRE1V’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.
What is free cash flow?
Nokian Renkaat Oyj’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 Nokian Renkaat Oyj to continue to grow, or at least, maintain its current operations.
I will be analysing Nokian Renkaat Oyj’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
Although, Nokian Renkaat Oyj generate sufficient cash from its operational activities, its FCF yield of 6.61% is roughly in-line with the broader market’s high single-digit yield. This means investors are being compensated at the same level as they would be if they just held the well-diversified market index.
Is Nokian Renkaat Oyj’s yield sustainable?
Can NRE1V 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 few years, expected growth for NRE1V’s operating cash is negative, with operating cash flows expected to decline from its current level of €430.7m. This is unfavourable to its future outlook, especially if capital expenditure heads the opposite direction. However, breaking down growth into a year on year basis, NRE1V ‘s negative growth rate improves each year, from -3.2% in the upcoming year, to 1.8% by the end of the third year.
Nokian Renkaat Oyj is compensating investors at a cash yield similar to the wider market portfolio, but holding the stock on its own is riskier than investing in the diversified market, which means the yield is not that attractive on a risk-return basis. Furthermore, its declining operating cash flow doesn’t add to the investment case. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I suggest you continue to research Nokian Renkaat Oyj to get a better picture of the company by looking at:
- Valuation: What is NRE1V 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 NRE1V 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 Nokian Renkaat Oyj’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 email@example.com.