Yahoo Finance Should Investors Be Happy About Tabcorp Holdings Limited’s (ASX:TAH) Cash Levels?
Tabcorp Holdings Limited (ASX:TAH) 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 TAH’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 Tabcorp Holdings
Is Tabcorp Holdings generating enough cash?
Tabcorp Holdings’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 Tabcorp Holdings to continue to grow, or at least, maintain its current operations. I will be analysing Tabcorp Holdings’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, Tabcorp Holdings also generates a positive free cash flow. However, the yield of 2.79% is not sufficient to compensate for the level of risk investors are taking on. This is because Tabcorp Holdings’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Is TAH’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 TAH’s expected operating cash flows. Over the next few years, a doubling in growth of operating cash flows, from current levels of AU$318.30M, is extremely uplifting especially if capital expenditure grows at a lower rate. Although this seems impressive, breaking down into year-on-year growth rates, TAH’s operating cash flow growth is expected to decline from a rate of 103.09% in the next year, to 18.98% by the end of the following year.
Next Steps:
Given a low free cash flow yield, on the basis of cash, Tabcorp Holdings becomes a less appealing investment. 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 Tabcorp Holdings to get a more holistic view of the company by looking at:
Valuation: What is TAH 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 TAH 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 Tabcorp Holdings’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 pass 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.
