Aggreko Plc (LON:AGK) 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’ve analysed below, the health and outlook of AGK’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 Aggreko
What is free cash flow?
Free cash flow (FCF) is the amount of cash Aggreko 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 Aggreko’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
Aggreko’s yield of 5.6% 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 Aggreko is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
Is Aggreko’s yield sustainable?
Does AGK’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 69%, ramping up from its current levels of UK£322m to UK£545m in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, AGK’s operating cash flow growth is expected to decline from a rate of 40% in the upcoming year, to 15% by the end of the third year. But the overall future outlook seems buoyant if AGK can maintain its levels of capital expenditure as well.
Next Steps:
Aggreko’s positive operating cash flow is encouraging, and its yield is relatively similar to the market index. However, you are taking on more risk by holding a single-stock rather than the well-diversified market index. This means, in terms of risk and return, it’s not the best deal. Now you know to keep cash flows in mind, I recommend you continue to research Aggreko to get a better picture of the company by looking at: