Yahoo Finance The Citadel Group Limited (ASX:CGL): Exploring Free Cash Flows
The Citadel Group Limited (ASX:CGL) 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. Today we will examine CGL’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.
Check out our latest analysis for Citadel Group
What is Citadel Group’s cash yield?
Free cash flow (FCF) is the amount of cash Citadel Group 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 Citadel Group’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
Along with a positive operating cash flow, Citadel Group also generates a positive free cash flow. However, the yield of 0.25% is not sufficient to compensate for the level of risk investors are taking on. This is because Citadel Group’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Is Citadel Group’s yield sustainable?
Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at CGL’s expected operating cash flows. In the next couple of years, the company is expected to grow its cash from operations at a double-digit rate of 69.6%, ramping up from its current levels of AU$19.2m to AU$32.6m in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, CGL’s operating cash flow growth is expected to decline from a rate of 25.2% in the upcoming year, to 4.8% by the end of the third year. But the overall future outlook seems buoyant if CGL 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. 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 Citadel Group to get a better picture of the company by looking at:
Valuation: What is CGL 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 CGL 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 Citadel 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.
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.
