Two important questions to ask before you buy New Look Vision Group Inc. (TSE:BCI) 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 industry, BCI is currently valued at CA$483m. I will take you through BCI’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 New Look Vision Group generating enough cash?
New Look Vision Group’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 New Look Vision Group to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of New Look Vision 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
New Look Vision Group’s yield of 3.76% 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 New Look Vision Group but are not being adequately rewarded for doing so.
Is New Look Vision Group’s yield sustainable?
Does BCI’s future look brighter in terms of its ability to generate higher operating cash flows? This can be estimated by examining the trend of the company’s operating cash flow moving forward. Over the next few years, the company is expected to grow its cash from operations at a double-digit rate of 33%, ramping up from its current levels of CA$37m to CA$49m in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, BCI’s operating cash flow growth is expected to decline from a rate of 24% next year, to 7.4% in the following year. But the overall future outlook seems buoyant if BCI can maintain its levels of capital expenditure as well.
The company’s low yield relative to the market index means you are taking on more risk holding the single-stock New Look Vision Group as opposed to the diversified market portfolio, and being compensated for less. Though the high operating cash flow growth in the future could change this. 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 New Look Vision Group to get a more holistic view of the company by looking at:
- Valuation: What is BCI 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 BCI 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 New Look Vision 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.
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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.