Two important questions to ask before you buy Scout24 AG (FRA:G24) is, how it makes money and how it spends its cash. 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 G24’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 free cash flow?
Scout24 generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short.
There are two methods I will use to evaluate the quality of Scout24’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, Scout24 also generates a positive free cash flow. However, the yield of 3.06% is not sufficient to compensate for the level of risk investors are taking on. This is because Scout24’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Is Scout24’s yield sustainable?
Does G24’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 couple years, the company is expected to grow its cash from operations at a double-digit rate of 54.6%, ramping up from its current levels of €193.4m to €299.0m in three years’ time. Furthermore, breaking down growth into a year on year basis, G24 is able to increase its growth rate each year, from 15.0% in the upcoming year, to 17.8% by the end of the third year. The overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto Scout24 relative to a well-diversified market index. However, the high growth in operating cash flow may change the tides in the future. Now you know to keep cash flows in mind, I recommend you continue to research Scout24 to get a better picture of the company by looking at:
- Valuation: What is G24 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 G24 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 Scout24’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 email@example.com.