If you are currently a shareholder in Treasury Wine Estates Limited (ASX:TWE), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. Today we will examine TWE’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.
Is Treasury Wine Estates generating enough cash?
Free cash flow (FCF) is the amount of cash Treasury Wine Estates 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 Treasury Wine Estates’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
Treasury Wine Estates’s yield of 0.48% 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 Treasury Wine Estates but are not being adequately rewarded for doing so.
Is Treasury Wine Estates’s yield sustainable?
Does TWE’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 47.88%, ramping up from its current levels of AU$333.60m to AU$493.31m in two years’ time. Furthermore, breaking down growth into a year on year basis, TWE is able to increase its growth rate each year, from 21.21% next year, to 22.00% in the following year. The overall future outlook seems buoyant if TWE can maintain its levels of capital expenditure as well.
Given a low free cash flow yield, on the basis of cash, Treasury Wine Estates 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, You should continue to research Treasury Wine Estates to get a more holistic view of the company by looking at:
- Valuation: What is TWE 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 TWE 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 Treasury Wine Estates’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 email@example.com.