Is ServiceSource International Inc (NASDAQ:SREV) Spending Too Much Money?
ServiceSource International Inc (NASDAQ:SREV) 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 it consulting and other services industry, SREV is currently valued at US$272.8m. I’ve analysed below, the health and outlook of SREV’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 ServiceSource International
Is ServiceSource International generating enough cash?
Free cash flow (FCF) is the amount of cash ServiceSource International 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.
There are two methods I will use to evaluate the quality of ServiceSource International’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
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
ServiceSource International’s yield of 7.3% last year indicates its ability to produce cash at the same rate as the market index, taking into account the company’s size. However, given that the risk for holding single-stock ServiceSource International is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
Does ServiceSource International have a favourable cash flow trend?
Does SREV’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 41.5%, ramping up from its current levels of US$19.2m to US$27.1m in two years’ time. Furthermore, breaking down growth into a year on year basis, SREV is able to increase its growth rate each year, from 10.1% next year, to 28.5% in the following year. The overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
ServiceSource International is compensating investors at a cash yield similar to the wider market portfolio. However, if you factor in the higher risk of holding just ServiceSource International compared to the well-diversified market index, the stock doesn’t seem as appealing. Now you know to keep cash flows in mind, I suggest you continue to research ServiceSource International to get a better picture of the company by looking at:
Valuation: What is SREV 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 SREV 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 ServiceSource International’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.
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.
