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If you are currently a shareholder in Super Retail Group Limited (ASX:SUL), 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. Today we will examine SUL’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 Super Retail Group’s cash yield?
Free cash flow (FCF) is the amount of cash Super Retail Group 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 Super Retail Group’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
Although, Super Retail Group generate sufficient cash from its operational activities, its FCF yield of 7.19% 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.
What’s the cash flow outlook for Super Retail Group?
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 SUL’s expected operating cash flows. Over the next few years, expected growth for SUL’s operating cash is negative, with operating cash flows expected to decline from its current level of AU$250m. 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, SUL ‘s negative growth rate improves each year, from -6.5% next year, to 6.1% in the following year.
Super Retail Group 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. You should continue to research Super Retail Group to get a more holistic view of the company by looking at:
- Valuation: What is SUL 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 SUL 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 Super Retail Group’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 firstname.lastname@example.org. 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.