How Much Money Does Koninklijke Philips NV (AMS:PHIA) Make?
Koninklijke Philips NV (AMS:PHIA) 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. 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 PHIA’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 Koninklijke Philips
What is Koninklijke Philips’s cash yield?
Koninklijke Philips’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 Koninklijke Philips to continue to grow, or at least, maintain its current operations.
I will be analysing Koninklijke Philips’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, Koninklijke Philips generate sufficient cash from its operational activities, its FCF yield of 7.37% 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 Koninklijke Philips’s yield sustainable?
Can PHIA 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 couple of years, the company is expected to grow its cash from operations at a double-digit rate of 26.24%, ramping up from its current levels of €2.23b to €2.82b in three years’ time. Furthermore, breaking down growth into a year on year basis, PHIA is able to increase its growth rate each year, from 1.59% in the upcoming year, to 9.57% by the end of the third year. The overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
The yield you receive on Koninklijke Philips is in-line with that of holding the broader market index. However, you are taking on more risk by holding a single-stock rather than the well-diversified market index. This means, in terms of risk and return, it’s not the best deal. Now you know to keep cash flows in mind, I recommend you continue to research Koninklijke Philips to get a more holistic view of the company by looking at:
Valuation: What is PHIA 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 PHIA 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 Koninklijke Philips’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.
