Yahoo Finance Should You Care About Experience Co Limited’s (ASX:EXP) Cash Levels?
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Two important questions to ask before you buy Experience Co Limited (ASX:EXP) is, how it makes money and how it spends its cash. This difference directly flows down to how much the stock is worth. Operating in the industry, EXP is currently valued at AU$158m. I will take you through EXP’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.
Check out our latest analysis for Experience Co
What is free cash flow?
Experience Co’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 Experience Co to continue to grow, or at least, maintain its current operations.
The two ways to assess whether Experience Co’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
Along with a positive operating cash flow, Experience Co also generates a positive free cash flow. However, the yield of 0.79% is not sufficient to compensate for the level of risk investors are taking on. This is because Experience Co’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
What’s the cash flow outlook for Experience Co?
Does EXP’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 few years, the company is expected to grow its cash from operations at a double-digit rate of 17%, ramping up from its current levels of AU$25m to AU$30m in two years’ time. Furthermore, breaking down growth into a year on year basis, EXP is able to increase its growth rate each year, from -2.6% next year, to 20% in the following year. The overall future outlook seems buoyant if EXP can maintain its levels of capital expenditure as well.
Next Steps:
Although its positive operating cash flow, and high future growth, is appealing, the low free cash flow yield is unattractive. This is because you would be better compensated in terms of cash yield, by investing in the market index, as well as take on lower diversification risk. However, cash is only one aspect of investing. Now you know to keep cash flows in mind, I suggest you continue to research Experience Co to get a more holistic view of the company by looking at:
Valuation: What is EXP 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 EXP 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 Experience Co’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. Thank you for reading.