Two important questions to ask before you buy Tate & Lyle plc (LON:TATE) is, how it makes money and how it spends its cash. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. Today we will examine TATE’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you.
Is Tate & Lyle generating enough cash?
Free cash flow (FCF) is the amount of cash Tate & Lyle 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 Tate & Lyle’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
Tate & Lyle’s yield of 5.84% 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 Tate & Lyle is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
Is Tate & Lyle’s yield sustainable?
Can TATE 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 19%, ramping up from its current levels of UK£286m to UK£341m in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, TATE’s operating cash flow growth is expected to decline from a rate of 13% in the upcoming year, to 1.9% by the end of the third year. But the overall future outlook seems buoyant if TATE can maintain its levels of capital expenditure as well.
Tate & Lyle is compensating investors at a cash yield similar to the wider market portfolio. However, if you factor in the higher risk of holding just Tate & Lyle compared to the well-diversified market index, the stock doesn’t seem as appealing. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I recommend you continue to research Tate & Lyle to get a more holistic view of the company by looking at:
- Valuation: What is TATE 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 TATE 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 Tate & Lyle’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 firstname.lastname@example.org.