Two important questions to ask before you buy Servizi Italia SpA (BIT:SRI) is, how it makes money and how it spends its cash. 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 SRI’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 Servizi Italia
What is free cash flow?
Free cash flow (FCF) is the amount of cash Servizi Italia 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 Servizi Italia’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, Servizi Italia also generates a positive free cash flow. However, the yield of 2.9% is not sufficient to compensate for the level of risk investors are taking on. This is because Servizi Italia’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 Servizi Italia?
Can SRI improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. Over the next few years, the company is expected to grow its cash from operations at a low single-digit rate of 0.2%, increasing from its current levels of €69m to €69m. Furthermore, breaking down growth into a year on year basis, SRI is able to increase its growth rate each year, from -1.9% next year, to 2.2% in the following year. The overall future outlook seems relatively optimistic if SRI can maintain its levels of capital expenditure as well.
Next Steps:
The company’s low yield relative to the market index means you are taking on more risk holding the single-stock Servizi Italia as opposed to the diversified market portfolio, and also being compensated for less. Furthermore, its muted operating cash flow growth doesn’t seem appealing. Now you know to keep cash flows in mind, You should continue to research Servizi Italia to get a better picture of the company by looking at: