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Global Payments Inc. (NYSE:GPN) shareholders, and potential investors, need to understand how much cash the business makes from its core operational activities, as well as how much is invested back into the business. This difference directly flows down to how much the stock is worth. Operating in the industry, GPN is currently valued at US$22b. Today we will examine GPN’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.
Is Global Payments generating enough cash?
Global Payments’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 Global Payments to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of Global Payments’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, Global Payments also generates a positive free cash flow. However, the yield of 3.59% is not sufficient to compensate for the level of risk investors are taking on. This is because Global Payments’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Does Global Payments have a favourable cash flow trend?
Can GPN 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 double-digit rate of 25%, ramping up from its current levels of US$1.1b to US$1.4b in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, GPN's operating cash flow growth is expected to decline from a rate of 19% next year, to 5.3% in the following year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
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 Global Payments to get a better picture of the company by looking at:
- Valuation: What is GPN 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 GPN 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 Global Payments’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.