Advertisement
U.S. markets open in 5 hours 5 minutes
  • S&P Futures

    5,304.25
    -4.00 (-0.08%)
     
  • Dow Futures

    40,101.00
    -43.00 (-0.11%)
     
  • Nasdaq Futures

    18,496.75
    -7.00 (-0.04%)
     
  • Russell 2000 Futures

    2,133.60
    -4.80 (-0.22%)
     
  • Crude Oil

    81.82
    +0.47 (+0.58%)
     
  • Gold

    2,213.10
    +0.40 (+0.02%)
     
  • Silver

    24.56
    -0.20 (-0.80%)
     
  • EUR/USD

    1.0797
    -0.0033 (-0.30%)
     
  • 10-Yr Bond

    4.1960
    0.0000 (0.00%)
     
  • Vix

    12.96
    +0.18 (+1.41%)
     
  • GBP/USD

    1.2610
    -0.0028 (-0.22%)
     
  • USD/JPY

    151.3800
    +0.1340 (+0.09%)
     
  • Bitcoin USD

    70,588.27
    +708.66 (+1.01%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,950.73
    +18.75 (+0.24%)
     
  • Nikkei 225

    40,168.07
    -594.66 (-1.46%)
     

Is SEB SA (EPA:SK) Spending Too Much Money?

SEB SA (EPA:SK) 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 SK’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.

See our latest analysis for SEB

Is SEB generating enough cash?

Free cash flow (FCF) is the amount of cash SEB 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 SEB’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

SEB’s yield of 3.38% 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 SEB but are not being adequately rewarded for doing so.

ENXTPA:SK Net Worth November 8th 18
ENXTPA:SK Net Worth November 8th 18

Does SEB have a favourable cash flow trend?

Does SK’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. Over the next few years, the company is expected to grow its cash from operations at a double-digit rate of 63%, ramping up from its current levels of €419m to €682m in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, SK’s operating cash flow growth is expected to decline from a rate of 44% next year, to 13% in the following year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.

Next Steps:

Given a low free cash flow yield, on the basis of cash, SEB becomes a less appealing investment. 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, You should continue to research SEB to get a better picture of the company by looking at:

  1. Valuation: What is SK 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 SK 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 SEB’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.

Advertisement