Sectra AB (publ) (STO:SECT B): What’s In It For The Shareholders?
If you are currently a shareholder in Sectra AB (publ) (STO:SECT B), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. This difference directly flows down to how much the stock is worth. Operating in the industry, SECT B is currently valued at kr9.9b. I’ve analysed below, the health and outlook of SECT B’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.
Check out our latest analysis for Sectra
Is Sectra generating enough cash?
Sectra’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for Sectra to continue to grow, or at least, maintain its current operations.
I will be analysing Sectra’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, Sectra also generates a positive free cash flow. However, the yield of 2.16% is not sufficient to compensate for the level of risk investors are taking on. This is because Sectra’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Is Sectra’s yield sustainable?
Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at SECT B’s expected operating cash flows. Over the next few years, the company is expected to grow its cash from operations at a low single-digit rate of 0.3%, increasing from its current levels of kr275m to kr276m. Furthermore, breaking down growth into a year on year basis, SECT B is able to increase its growth rate each year, from -6.1% next year, to 6.7% in the following year. The overall future outlook seems relatively optimistic if SECT B can maintain its levels of capital expenditure as well.
Next Steps:
The company’s low yield relative to the market index means you are taking on more risk holding the single-stock Sectra 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, You should continue to research Sectra to get a better picture of the company by looking at:
Valuation: What is SECT B 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 SECT B 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 Sectra’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 editorial-team@simplywallst.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.
