Two important questions to ask before you buy Cementir Holding SpA (BIT:CEM) is, how it makes money and how it spends its cash. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. I will take you through CEM’s cash flow health and the risk-return concept based on the stock’s cash flow yield, using the most recent financial data. This will help you think about the company from a cash perspective, which is a crucial factor to investing.

View our latest analysis for Cementir Holding

What is Cementir Holding’s cash yield?

Free cash flow (FCF) is the amount of cash Cementir Holding 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.

I will be analysing Cementir Holding’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

Cementir Holding’s yield of 3.61% 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 Cementir Holding but are not being adequately rewarded for doing so.

Does Cementir Holding 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 CEM’s expected operating cash flows. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 62%, ramping up from its current levels of €124m to €201m in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, CEM’s operating cash flow growth is expected to decline from a rate of 50% next year, to 8.4% in the following year. But the overall future outlook seems buoyant if CEM can maintain its levels of capital expenditure as well.

Next Steps:

Although its positive operating cash flow, and high future growth, is appealing, the low free cash flow yield is unattractive. This is because you would be better compensated in terms of cash yield, by investing in the market index, as well as take on lower diversification risk. However, cash is only one aspect of investing. Now you know to keep cash flows in mind, I suggest you continue to research Cementir Holding to get a better picture of the company by looking at: