Two important questions to ask before you buy Schaeffler AG (FRA:SHA) 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 auto parts and equipment industry, SHA is currently valued at €7.39b. I’ve analysed below, the health and outlook of SHA’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 Schaeffler
Is Schaeffler generating enough cash?
Free cash flow (FCF) is the amount of cash Schaeffler 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.
The two ways to assess whether Schaeffler’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
Schaeffler’s yield of 3.97% 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 Schaeffler but are not being adequately rewarded for doing so.
Is Schaeffler’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 SHA’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 19.3%, ramping up from its current levels of €1.79b to €2.14b in two years’ time. Furthermore, breaking down growth into a year on year basis, SHA is able to increase its growth rate each year, from 6.2% next year, to 12.3% in the following year. The overall future outlook seems buoyant if SHA 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 Schaeffler to get a better picture of the company by looking at: