Adacel Technologies Limited (ASX:ADA): What’s In It For The Shareholders?
Two important questions to ask before you buy Adacel Technologies Limited (ASX:ADA) is, how it makes money and how it spends its cash. This difference directly flows down to how much the stock is worth. Operating in the industry, ADA is currently valued at AU$52m. Today we will examine ADA’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.
See our latest analysis for Adacel Technologies
What is free cash flow?
Free cash flow (FCF) is the amount of cash Adacel Technologies 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 Adacel Technologies’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
Adacel Technologies’s yield of 14.08% last year indicates its ability to produce cash well-above the market index, given the size of the company. This means investors are adequately rewarded for the risk they take on by overweighting Adacel Technologies.
Does Adacel Technologies have a favourable cash flow trend?
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 ADA’s expected operating cash flows. Over the next couple years, the company is expected to grow its cash from operations at a double-digit rate of 29%, ramping up from its current levels of AU$8.6m to AU$11m in three years’ time. Furthermore, breaking down growth into a year on year basis, ADA is able to increase its growth rate each year, from 14% in the upcoming year, to 16% by the end of the third year. The overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
Not only does Adacel Technologies offer a yield above the market index, its operating cash flow growth in the short run further strengthens its case as a solid company to invest in going forward. Now you know to keep cash flows in mind, I suggest you continue to research Adacel Technologies to get a more holistic view of the company by looking at:
Valuation: What is ADA 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 ADA 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 Adacel Technologies’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.