Two important questions to ask before you buy SSP Group plc (LON:SSPG) 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, SSPG is currently valued at UK£3.0b. I will take you through SSPG’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.
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Is SSP Group generating enough cash?
SSP 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 SSP Group to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of SSP 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
Along with a positive operating cash flow, SSP Group also generates a positive free cash flow. However, the yield of 3.73% is not sufficient to compensate for the level of risk investors are taking on. This is because SSP Group’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Is SSP Group’s yield sustainable?
Does SSPG’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. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 34%, ramping up from its current levels of UK£273m to UK£367m in three years’ time. Furthermore, breaking down growth into a year on year basis, SSPG is able to increase its growth rate each year, from 4.8% in the upcoming year, to 10.0% by the end of the third year. The overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Given a low free cash flow yield, on the basis of cash, SSP Group becomes a less appealing investment. 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. Now you know to keep cash flows in mind, You should continue to research SSP Group to get a better picture of the company by looking at:
- Valuation: What is SSPG 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 SSPG 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 SSP 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.
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.