Yahoo Finance One Factor To Consider Before Investing In Port of Tauranga Limited (NZSE:POT)
Port of Tauranga Limited (NZSE:POT) 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 POT’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.
See our latest analysis for Port of Tauranga
What is free cash flow?
Port of Tauranga’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 Port of Tauranga to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of Port of Tauranga’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
Port of Tauranga’s yield of 2% 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 Port of Tauranga but are not being adequately rewarded for doing so.
Does Port of Tauranga have a favourable cash flow trend?
Does POT’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 few years, the company is expected to grow its cash from operations at a double-digit rate of 19%, ramping up from its current levels of NZ$99m to NZ$118m in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, POT’s operating cash flow growth is expected to decline from a rate of 19% in the upcoming year, to -4.8% by the end of the third year. But the overall future outlook seems buoyant if POT 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. However, cash is only one aspect of investing. Now you know to keep cash flows in mind, I suggest you continue to research Port of Tauranga to get a more holistic view of the company by looking at:
Valuation: What is POT 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 POT 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 Port of Tauranga’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.
