If you are currently a shareholder in The Character Group plc (LON:CCT), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. This difference directly flows down to how much the stock is worth. Operating in the industry, CCT is currently valued at UK£112m. I’ve analysed below, the health and outlook of CCT’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 Character Group’s cash yield?
Character Group 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 Character Group’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
Character Group’s yield of 9.07% 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 Character Group is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
What’s the cash flow outlook for Character Group?
Can CCT 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. Over the next couple years, the company is expected to grow its cash from operations at a double-digit rate of 33%, ramping up from its current levels of UK£11m to UK£14m in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, CCT’s operating cash flow growth is expected to decline from a rate of 1.9% in the upcoming year, to 1.5% by the end of the third year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Character Group’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 Character Group to get a better picture of the company by looking at:
- Valuation: What is CCT 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 CCT 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 Character Group’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.
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