If you are currently a shareholder in Steelcase Inc. (NYSE:SCS), 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. I’ve analysed below, the health and outlook of SCS’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.
What is Steelcase’s cash yield?
Steelcase 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 Steelcase’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
Along with a positive operating cash flow, Steelcase also generates a positive free cash flow. However, the yield of 1.88% is not sufficient to compensate for the level of risk investors are taking on. This is because Steelcase’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Is Steelcase’s yield sustainable?
Can SCS improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 52%, ramping up from its current levels of US$178m to US$270m in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, SCS’s operating cash flow growth is expected to decline from a rate of 18% in the upcoming year, to 8.5% by the end of the third year. But the overall future outlook seems buoyant if SCS can maintain its levels of capital expenditure as well.
The company’s low yield relative to the market index means you are taking on more risk holding the single-stock Steelcase 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. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I suggest you continue to research Steelcase to get a better picture of the company by looking at:
- Valuation: What is SCS 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 SCS 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 Steelcase’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 email@example.com.