Magna International Inc. (TSE:MG): How Much Money Comes Back To Investors?
Two important questions to ask before you buy Magna International Inc. (TSE:MG) is, how it makes money and how it spends its cash. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. Today we will examine MG’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.
See our latest analysis for Magna International
What is free cash flow?
Magna International’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 Magna International to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of Magna International’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
Magna International’s yield of 3.44% 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 Magna International but are not being adequately rewarded for doing so.
Does Magna International have a favourable cash flow trend?
Can MG 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, the company is expected to grow its cash from operations at a low single-digit rate of 3.5%, increasing from its current levels of US$3.6b to US$3.7b. Furthermore, breaking down growth into a year on year basis, MG is able to increase its growth rate each year, from 0.4% next year, to 3.1% in the following year. The overall future outlook seems relatively optimistic if MG can maintain its levels of capital expenditure as well.
Next Steps:
Magna International’s low free cash flow yield is deterring, in addition to its low growth prospects. This means that, as an investor, you would be rewarded less than just holding a portfolio made up of all the stocks in the market, as well as taking on higher risk! Now you know to keep cash flows in mind, I recommend you continue to research Magna International to get a more holistic view of the company by looking at:
Valuation: What is MG 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 MG 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 Magna International’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 editorial-team@simplywallst.com.
