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Two important questions to ask before you buy Brembo SpA (BIT:BRE) 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 auto parts and equipment industry, BRE is currently valued at €3.72b. Today we will examine BRE’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 Brembo
What is free cash flow?
Brembo generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short.
I will be analysing Brembo’s FCF by looking at its FCF yield and its operating cash flow growth. The yield will tell us whether the stock is generating enough cash to compensate for the risk investors take on by holding a single stock, which I will compare to the market index. The growth will proxy for sustainability levels of this cash generation.
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, Brembo also generates a positive free cash flow. However, the yield of 0.49% is not sufficient to compensate for the level of risk investors are taking on. This is because Brembo’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
What’s the cash flow outlook for Brembo?
Does BRE’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 23.6%, ramping up from its current levels of €391.6m to €484.1m in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, BRE’s operating cash flow growth is expected to decline from a rate of 12.5% next year, to 9.9% in the following year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto Brembo relative to a well-diversified market index. However, the high growth in operating cash flow may change the tides in the future. Now you know to keep cash flows in mind, You should continue to research Brembo to get a more holistic view of the company by looking at: