Yahoo Finance What You Need To Know About Coca-Cola HBC AG’s (LON:CCH) Cash Situation
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Coca-Cola HBC AG (LON:CCH) 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 CCH’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.
View our latest analysis for Coca-Cola HBC
What is free cash flow?
Free cash flow (FCF) is the amount of cash Coca-Cola HBC 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.
The two ways to assess whether Coca-Cola HBC’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, Coca-Cola HBC also generates a positive free cash flow. However, the yield of 3.78% is not sufficient to compensate for the level of risk investors are taking on. This is because Coca-Cola HBC’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Is Coca-Cola HBC'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 CCH’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 34%, ramping up from its current levels of €797m to €1.1b in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, CCH's operating cash flow growth is expected to decline from a rate of 16% in the upcoming year, to 5.7% by the end of the third year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
Given a low free cash flow yield, on the basis of cash, Coca-Cola HBC 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 Coca-Cola HBC to get a better picture of the company by looking at:
Valuation: What is CCH 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 CCH 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 Coca-Cola HBC’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.
