Is Toromont Industries Ltd. (TSE:TIH) Spending Too Much Money?
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If you are currently a shareholder in Toromont Industries Ltd. (TSE:TIH), 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 TIH’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 Toromont Industries
What is free cash flow?
Toromont Industries’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 Toromont Industries to continue to grow, or at least, maintain its current operations.
I will be analysing Toromont Industries’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
Toromont Industries’s yield of 10.82% last year indicates its ability to produce cash well-above the market index, given the size of the company. This means investors are adequately rewarded for the risk they take on by overweighting Toromont Industries.
Does Toromont Industries have a favourable cash flow trend?
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 TIH’s expected operating cash flows. In the next few years, expected growth for TIH’s operating cash is negative, with operating cash flows expected to decline from its current level of CA$506m. This is unfavourable to its future outlook, especially if capital expenditure heads the opposite direction. However, breaking down growth into a year on year basis, TIH ‘s negative growth rate improves each year, from -19% next year, to 3.4% in the following year.
Next Steps:
Although Toromont Industries provides an attractive cash flow yield relative to the market index, its expected negative cash flow growth raises concerns around whether this yield is sustainable. Now you know to keep cash flows in mind, You should continue to research Toromont Industries to get a better picture of the company by looking at:
Valuation: What is TIH 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 TIH 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 Toromont Industries’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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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. On rare occasion, data errors may occur. Thank you for reading.
