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One Factor To Consider Before Investing In Brunello Cucinelli S.p.A. (BIT:BC)

Ingrid Hart

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Brunello Cucinelli S.p.A. (BIT:BC) 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. I’ve analysed below, the health and outlook of BC’s cash flow, which will help you understand the stock from a cash standpoint. Cash is an important concept to grasp as an investor, as it directly impacts the value of your shares and the future growth potential of your portfolio.

See our latest analysis for Brunello Cucinelli

Is Brunello Cucinelli generating enough cash?

Free cash flow (FCF) is the amount of cash Brunello Cucinelli has left after it pays off its expenses, including its net capital expenditures, which is what the company needs to spend each year to maintain or grow its business operations.

There are two methods I will use to evaluate the quality of Brunello Cucinelli’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, Brunello Cucinelli also generates a positive free cash flow. However, the yield of 1.32% is not sufficient to compensate for the level of risk investors are taking on. This is because Brunello Cucinelli’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.

BIT:BC Net Worth February 17th 19

What’s the cash flow outlook for Brunello Cucinelli?

Does BC’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 couple of years, the company is expected to grow its cash from operations at a low single-digit rate of 3.9%, increasing from its current levels of €80m to €83m. Furthermore, breaking down growth into a year on year basis, BC is able to increase its growth rate each year, from -3.0% next year, to 7.0% in the following year. The overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.

Next Steps:

The company’s low yield relative to the market index means you are taking on more risk holding the single-stock Brunello Cucinelli as opposed to the diversified market portfolio, and also being compensated for less. Furthermore, its muted operating cash flow growth doesn’t seem appealing. Now you know to keep cash flows in mind, I suggest you continue to research Brunello Cucinelli to get a more holistic view of the company by looking at:

  1. Valuation: What is BC 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 BC is currently mispriced by the market.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Brunello Cucinelli’s board and the CEO’s back ground.
  3. 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.