NetScout Systems Inc (NASDAQ:NTCT) 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 communications equipment industry, NTCT is currently valued at US$2.3b. I will take you through NTCT’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.
What is free cash flow?
NetScout Systems 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.
I will be analysing NetScout Systems’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, NetScout Systems generate sufficient cash from its operational activities, its FCF yield of 7.27% 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 NetScout Systems’s yield sustainable?
Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at NTCT’s expected operating cash flows. In the next couple of years, the company is expected to grow its cash from operations at a double-digit rate of 41%, ramping up from its current levels of US$195m to US$275m in three years’ time. Furthermore, breaking down growth into a year on year basis, NTCT is able to increase its growth rate each year, from 2.4% in the upcoming year, to 8.6% by the end of the third year. The overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
NetScout Systems is compensating investors at a cash yield similar to the wider market portfolio. But, in saying this, investors are taking on more risk by buying one single stock as opposed to a diversified market portfolio, but they are being compensated at the same level. Not the best deal! Now you know to keep cash flows in mind, I recommend you continue to research NetScout Systems to get a better picture of the company by looking at:
- Valuation: What is NTCT 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 NTCT 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 NetScout Systems’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 firstname.lastname@example.org.