Two important questions to ask before you buy KappAhl AB (publ) (STO:KAHL) 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 apparel retail industry, KAHL is currently valued at kr2.4b. Today we will examine KAHL’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.
Check out our latest analysis for KappAhl
What is free cash flow?
KappAhl’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for KappAhl to continue to grow, or at least, maintain its current operations.
The two ways to assess whether KappAhl’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
KappAhl’s yield of 4.88% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on KappAhl but are not being adequately rewarded for doing so.
Is KappAhl’s yield sustainable?
Does KAHL’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. Over the next few years, expected growth for KAHL’s operating cash is negative, with operating cash flows expected to decline from its current level of kr405m. This is unfavourable to its future outlook, especially if capital expenditure heads the opposite direction. Breaking down operating cash growth into a year-on-year basis, it seems like KAHL will face a continued decline in growth rates, from 0.7% next year, to -4.1% in the following year.
Next Steps:
KappAhl’s low free cash flow yield is deterring, in addition to its negative growth prospects. This means that, as an investor, you would be rewarded less than just holding a portfolio made up of all the stocks in the market, as well as taking on higher risk! 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 KappAhl to get a more holistic view of the company by looking at: