Progress Software Corporation (NASDAQ:PRGS) 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. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. I’ve analysed below, the health and outlook of PRGS’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 Progress Software
What is free cash flow?
Free cash flow (FCF) is the amount of cash Progress Software 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. I will be analysing Progress Software’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
Although, Progress Software generate sufficient cash from its operational activities, its FCF yield of 6.17% is roughly in-line with the broader market’s high single-digit yield. This means investors are being compensated at the same level as they would be if they just held the well-diversified market index.
Does PRGS have a favourable cash flow trend?
Can PRGS 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 this case, analysts have only forecasted operating cash growth for one year, which makes it difficult to assess sustainability. However, just looking at the upcoming year outlook, a growth of low single-digit 1.77% isn’t exciting, but it may be adequate, so long as capital expenditure doesn’t ramp up by even more.
What this means for you:
Are you a shareholder? Progress Software is compensating investors at a cash yield similar to the wider market portfolio. However, you are taking on more risk by holding a single-stock rather than the well-diversified market index. This means, in terms of risk and return, it’s not the best deal. Though, it is important to keep in mind that cash is only one aspect of investing, and if other fundamentals of Progress Software are appealing, then you may want to consider holding onto your shares.
Are you a potential investor? Its positive operating cash flow is a good sign of disciplined operational efficiency, leading to a yield in-line to the market portfolio. But, in saying this, investors are taking on more risk by buying one single stock as opposed to a diversified market portfolio, but they are being compensated at the same level. Not the best deal! Keep in mind that this is only one aspect of investment analysis, and there are other important fundamentals, such as past track record and financial leverage, to assess before you decide whether or not to invest.
Interested in learning more about Progress Software’s fundamentals? To quickly understand whether it is a good investment for you, scroll through our FREE easy-to-understand infographics report. If you’re curious about other attractive investments, explore our list of high-growth and undervalued stocks here.
To help readers see pass 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.