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The Citadel Group Limited (ASX:CGL): What’s In It For The Shareholders?

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If you are currently a shareholder in The Citadel Group Limited (ASX:CGL), 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, CGL is currently valued at AU$364m. I will take you through CGL’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.

View our latest analysis for Citadel Group

What is free cash flow?

Citadel Group’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 Citadel Group to continue to grow, or at least, maintain its current operations.

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There are two methods I will use to evaluate the quality of Citadel Group’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.

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

Citadel Group’s yield of 4.83% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on Citadel Group but are not being adequately rewarded for doing so.

ASX:CGL Balance Sheet Net Worth, April 1st 2019
ASX:CGL Balance Sheet Net Worth, April 1st 2019

Is Citadel Group's yield sustainable?

Does CGL’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. Over the next few years, the company is expected to grow its cash from operations at a double-digit rate of 44%, ramping up from its current levels of AU$21m to AU$31m in two years’ time. Furthermore, breaking down growth into a year on year basis, CGL is able to increase its growth rate each year, from 12% next year, to 28% in the following year. The overall future outlook seems buoyant if CGL can maintain its levels of capital expenditure as well.

Next Steps:

Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto Citadel Group relative to a well-diversified market index. However, the high growth in operating cash flow may change the tides in the future. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. You should continue to research Citadel Group to get a better picture of the company by looking at:

  1. 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.

  2. 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.

  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.

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.