If you are currently a shareholder in Merlin Entertainments plc (LON:MERL), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. This difference directly flows down to how much the stock is worth. Operating in the industry, MERL is currently valued at UK£3.4b. I’ve analysed below, the health and outlook of MERL’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 Merlin Entertainments
What is Merlin Entertainments’s cash yield?
Free cash flow (FCF) is the amount of cash Merlin Entertainments 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.
There are two methods I will use to evaluate the quality of Merlin Entertainments’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
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
The business reinvests all its cash profits as well as borrows more money, to maintain and grow the company. This leads to a negative FCF, as well as negative FCF yield, in which case is not a very useful measure.
Does Merlin Entertainments have a favourable cash flow trend?
Merlin Entertainments’s FCF may be negative today, but is operating cash flows expected to improve in the future? Let’s examine the cash flow trend the company is anticipated to produce over time. Over the next few years, the company is expected to grow its cash from operations at a double-digit rate of 13%, ramping up from its current levels of UK£432m to UK£489m in two years’ time. Furthermore, breaking down growth into a year on year basis, MERL is able to increase its growth rate each year, from 3.4% next year, to 9.5% in the following year. The overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I suggest you continue to research Merlin Entertainments to get a more holistic view of the company by looking at: