Helloworld Travel Limited (ASX:HLO) 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. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. I will take you through HLO’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.
What is Helloworld Travel’s cash yield?
Helloworld Travel’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 Helloworld Travel to continue to grow, or at least, maintain its current operations.
The two ways to assess whether Helloworld Travel’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
Helloworld Travel’s yield of 5.34% last year indicates its ability to produce cash at the same rate as the market index, taking into account the company’s size. However, given that the risk for holding single-stock Helloworld Travel is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
Does Helloworld Travel have a favourable cash flow trend?
Does HLO’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 couple of years, the company is expected to grow its cash from operations at a double-digit rate of 63.8%, ramping up from its current levels of AU$41.3m to AU$67.6m in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, HLO’s operating cash flow growth is expected to decline from a rate of 28.1% in the upcoming year, to 13.1% by the end of the third year. But the overall future outlook seems buoyant if HLO can maintain its levels of capital expenditure as well.
The yield you receive on Helloworld Travel is in-line with that of holding the broader market index. But, in saying this, investors are taking on more risk by buying one single stock as opposed to a diversified market portfolio, but they are being compensated at the same level. Not the best deal! Now you know to keep cash flows in mind, You should continue to research Helloworld Travel to get a better picture of the company by looking at:
- Valuation: What is HLO 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 HLO 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 Helloworld Travel’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 firstname.lastname@example.org.