Centuria Metropolitan REIT (ASX:CMA) 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 industry, CMA is currently valued at AU$876m. I’ve analysed below, the health and outlook of CMA’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.
Is Centuria Metropolitan REIT generating enough cash?
Free cash flow (FCF) is the amount of cash Centuria Metropolitan REIT 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.
The two ways to assess whether Centuria Metropolitan REIT’s FCF is sufficient, is to compare the FCF yield to the market index yield, as well as determine whether the top-line operating cash flows will continue to grow.
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
Centuria Metropolitan REIT’s yield of 0.43% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on Centuria Metropolitan REIT but are not being adequately rewarded for doing so.
Is Centuria Metropolitan REIT’s yield sustainable?
Can CMA 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 few years, the company is expected to grow its cash from operations at a double-digit rate of 15%, ramping up from its current levels of AU$58m to AU$67m in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, CMA’s operating cash flow growth is expected to decline from a rate of 9.3% next year, to 5.4% in the following year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Although its positive operating cash flow, and high future growth, is appealing, the low free cash flow yield is unattractive. 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, I recommend you continue to research Centuria Metropolitan REIT to get a better picture of the company by looking at:
- Valuation: What is CMA 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 CMA 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 Centuria Metropolitan REIT’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.
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If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.