Synthomer plc (LON:SYNT): The Yield That Matters The Most
If you are currently a shareholder in Synthomer plc (LON:SYNT), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. 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 SYNT’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.
View our latest analysis for Synthomer
Is Synthomer generating enough cash?
Synthomer’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 Synthomer to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of Synthomer’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
Synthomer’s yield of 5.08% 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 Synthomer is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
What’s the cash flow outlook for Synthomer?
Does SYNT’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 few years, the company is expected to grow its cash from operations at a double-digit rate of 23%, ramping up from its current levels of UK£141m to UK£173m in three years’ time. Furthermore, breaking down growth into a year on year basis, SYNT is able to increase its growth rate each year, from -6.1% in the upcoming year, to 15% by the end of the third year. The overall future outlook seems buoyant if SYNT can maintain its levels of capital expenditure as well.
Next Steps:
Synthomer’s positive operating cash flow is encouraging, and its yield is relatively similar to the market index. But holding the stock on its own is riskier than investing in the diversified market, which means the yield is not that attractive on a risk-return basis. Now you know to keep cash flows in mind, I recommend you continue to research Synthomer to get a better picture of the company by looking at:
Valuation: What is SYNT 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 SYNT 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 Synthomer’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.
