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Two important questions to ask before you buy Orkla ASA (OB:ORK) 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. Today we will examine ORK’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 Orkla
What is Orkla’s cash yield?
Free cash flow (FCF) is the amount of cash Orkla 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 Orkla’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
Orkla’s yield of 13.42% last year indicates its ability to produce cash well-above the market index, given the size of the company. This means investors are adequately rewarded for the risk they take on by overweighting Orkla.
Is Orkla’s yield sustainable?
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 ORK’s expected operating cash flows. Over the next couple years, the company is expected to grow its cash from operations at a double-digit rate of 48%, ramping up from its current levels of øre3.9b to øre5.8b in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, ORK’s operating cash flow growth is expected to decline from a rate of 16% in the upcoming year, to 14% by the end of the third year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
The outcome of Orkla’s cash flow analysis is compelling. Its high potential lies in above-market cash yield as well as a strong cash flow growth outlook. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. You should continue to research Orkla to get a more holistic view of the company by looking at: