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New Relic, Inc. (NYSE:NEWR) 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 will take you through NEWR’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 New Relic’s cash yield?
Free cash flow (FCF) is the amount of cash New Relic 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.
I will be analysing New Relic’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
Along with a positive operating cash flow, New Relic also generates a positive free cash flow. However, the yield of 0.80% is not sufficient to compensate for the level of risk investors are taking on. This is because New Relic’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
What’s the cash flow outlook for New Relic?
Does NEWR’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, a doubling in growth of operating cash flows, from current levels of US$78m, is extremely uplifting especially if capital expenditure grows at a lower rate. Furthermore, breaking down growth into a year-on-year basis, NEWR is expected to be able to increase its growth rate each year for the next three years.
The company’s low yield relative to the market index means you are taking on more risk holding the single-stock New Relic as opposed to the diversified market portfolio, and being compensated for less. Though the high operating cash flow growth in the future could change this. Now you know to keep cash flows in mind, I suggest you continue to research New Relic to get a more holistic view of the company by looking at:
- Valuation: What is NEWR 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 NEWR 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 New Relic’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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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.