Yahoo Finance Scales Corporation Limited (NZSE:SCL): What’s In It For The Shareholders?
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Two important questions to ask before you buy Scales Corporation Limited (NZSE:SCL) is, how it makes money and how it spends its cash. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. I will take you through SCL’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.
Check out our latest analysis for Scales
What is Scales's cash yield?
Scales’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 Scales to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of Scales’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
Along with a positive operating cash flow, Scales also generates a positive free cash flow. However, the yield of 2.4% is not sufficient to compensate for the level of risk investors are taking on. This is because Scales’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Is Scales'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 SCL’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 37%, ramping up from its current levels of NZ$37m to NZ$50m in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, SCL's operating cash flow growth is expected to decline from a rate of 12% in the upcoming year, to 4.2% by the end of the third year. But the overall future outlook seems buoyant if SCL can maintain its levels of capital expenditure as well.
Next Steps:
Given a low free cash flow yield, on the basis of cash, Scales 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 Scales to get a better picture of the company by looking at:
Valuation: What is SCL 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 SCL 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 Scales’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.
