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One Factor To Consider Before Investing In Roots Corporation (TSE:ROOT)

If you are currently a shareholder in Roots Corporation (TSE:ROOT), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. Today we will examine ROOT’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.

Check out our latest analysis for Roots

What is free cash flow?

Roots 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.

The two ways to assess whether Roots’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

After accounting for capital expenses required to run the business, Roots is not able to generate positive FCF, leading to a negative FCF yield – not very useful for interpretation!

TSX:ROOT Net Worth December 5th 18

Is Roots’s yield sustainable?

Does Roots’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 going forward. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 88%, ramping up from its current levels of CA$22m to CA$42m in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, ROOT’s operating cash flow growth is expected to decline from a rate of 46% next year, to 29% in the following year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.

Next Steps:

Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I recommend you continue to research Roots to get a better picture of the company by looking at:

  1. Valuation: What is ROOT 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 ROOT 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 Roots’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.