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TCM Group A/S (CPH:TCM) 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. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. Today we will examine TCM’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.
View our latest analysis for TCM Group
What is TCM Group’s cash yield?
Free cash flow (FCF) is the amount of cash TCM Group 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 TCM Group’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
TCM Group’s yield of 5.91% 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 TCM Group is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
Does TCM Group 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 TCM’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 30%, ramping up from its current levels of ø103m to ø133m in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, TCM’s operating cash flow growth is expected to decline from a rate of 24% next year, to 5.1% in the following year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
The yield you receive on TCM Group is in-line with that of holding the broader market index. But, in saying this, investors are taking on more risk by buying one single stock as opposed to a diversified market portfolio, but they are being compensated at the same level. Not the best deal! Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I recommend you continue to research TCM Group to get a better picture of the company by looking at: