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Why Telia Company AB (publ)’s (STO:TELIA) Cash Is A Factor You Need To Consider

If you are currently a shareholder in Telia Company AB (publ) (STO:TELIA), 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’ve analysed below, the health and outlook of TELIA’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.

See our latest analysis for Telia Company

What is free cash flow?

Telia Company’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 Telia Company to continue to grow, or at least, maintain its current operations.

The two ways to assess whether Telia Company’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

Telia Company’s yield of 6.06% 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 Telia Company is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.

OM:TELIA Net Worth November 20th 18
OM:TELIA Net Worth November 20th 18

What’s the cash flow outlook for Telia Company?

Does TELIA’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 couple of years, expected growth for TELIA’s operating cash is negative, with operating cash flows expected to decline from its current level of kr27b. 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, TELIA ‘s negative growth rate improves each year, from -4.5% in the upcoming year, to 3.5% by the end of the third year.

Next Steps:

Telia Company’s free cash flow yield suggests you are not being compensated over and above the market index, although you are taking on more risk investing in a single stock. In addition to this, its negative operating cash flow growth outlook is unappealing. 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 Telia Company to get a better picture of the company by looking at:

  1. Valuation: What is TELIA 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 TELIA is currently mispriced by the market.

  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Telia Company’s board and the CEO’s back ground.

  3. 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.

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