Yahoo Finance Is New Oriental Education & Technology Group Inc’s (NYSE:EDU) Cash Outlook Optimistic?
New Oriental Education & Technology Group Inc (NYSE:EDU) 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. This difference directly flows down to how much the stock is worth. Operating in the education services industry, EDU is currently valued at US$9.7b. I’ve analysed below, the health and outlook of EDU’s cash flow, which will help you understand the stock from a cash standpoint. Cash is an important concept to grasp as an investor, as it directly impacts the value of your shares and the future growth potential of your portfolio.
Check out our latest analysis for New Oriental Education & Technology Group
Is New Oriental Education & Technology Group generating enough cash?
Free cash flow (FCF) is the amount of cash New Oriental Education & Technology Group 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.
There are two methods I will use to evaluate the quality of New Oriental Education & Technology 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
New Oriental Education & Technology Group’s yield of 8.07% 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 New Oriental Education & Technology Group is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
What’s the cash flow outlook for New Oriental Education & Technology Group?
Can EDU improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. In the next couple of years, the company is expected to grow its cash from operations at a double-digit rate of 73%, ramping up from its current levels of US$781m to US$1.3b in three years’ time. Furthermore, breaking down growth into a year on year basis, EDU is able to increase its growth rate each year, from 5.8% in the upcoming year, to 17% by the end of the third year. The overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
The yield you receive on New Oriental Education & Technology Group is in-line with that of holding the broader market index. But holding the stock on its own is riskier than investing in the diversified market, which means the yield is not that attractive on a risk-return basis. 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 New Oriental Education & Technology Group to get a more holistic view of the company by looking at:
Valuation: What is EDU 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 EDU 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 New Oriental Education & Technology Group’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.
