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If you are currently a shareholder in The Navigator Company SA (ELI:NVG), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. I will take you through NVG’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 Navigator Company
Is Navigator Company generating enough cash?
Navigator Company’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 Navigator Company to continue to grow, or at least, maintain its current operations.
The two ways to assess whether Navigator Company’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
Navigator Company’s yield of 2.29% 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 Navigator Company but are not being adequately rewarded for doing so.
Is Navigator Company’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 NVG’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 23%, ramping up from its current levels of €347m to €427m in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, NVG’s operating cash flow growth is expected to decline from a rate of 12% in the upcoming year, to 2.5% by the end of the third year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
Given a low free cash flow yield, on the basis of cash, Navigator Company becomes a less appealing investment. 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. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I suggest you continue to research Navigator Company to get a better picture of the company by looking at: