QANTM Intellectual Property Limited (ASX:QIP) shareholders, and potential investors, need to understand how much cash the business makes from its core operational activities, as well as how much is invested back into the business. 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 QIP’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.

Check out our latest analysis for QANTM Intellectual Property

What is free cash flow?

QANTM Intellectual Property’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 QANTM Intellectual Property to continue to grow, or at least, maintain its current operations.

I will be analysing QANTM Intellectual Property’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

QANTM Intellectual Property’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 QANTM Intellectual Property but are not being adequately rewarded for doing so.

Does QANTM Intellectual Property 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 QIP’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 65%, ramping up from its current levels of AU$11m to AU$19m in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, QIP’s operating cash flow growth is expected to decline from a rate of 28% in the upcoming year, to 11% by the end of the third year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.