Yahoo Finance Should Investors Be Happy About Linamar Corporation’s (TSE:LNR) Cash Levels?
Linamar Corporation (TSE:LNR) 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. This difference directly flows down to how much the stock is worth. Operating in the auto parts and equipment industry, LNR is currently valued at CA$3.78b. Today we will examine LNR’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 Linamar
Is Linamar generating enough cash?
Free cash flow (FCF) is the amount of cash Linamar 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.
There are two methods I will use to evaluate the quality of Linamar’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
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
Linamar’s yield of 0.18% 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 Linamar but are not being adequately rewarded for doing so.
Is Linamar’s yield sustainable?
Does LNR’s future look brighter in terms of its ability to generate higher operating cash flows? This can be estimated by examining the trend of the company’s operating cash flow moving forward. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 50.94%, ramping up from its current levels of CA$763.17m to CA$1.15b in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, LNR’s operating cash flow growth is expected to decline from a rate of 29.82% in the upcoming year, to 6.40% 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, Linamar 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. You should continue to research Linamar to get a better picture of the company by looking at:
Valuation: What is LNR worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether LNR is currently mispriced by the market.
Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Linamar’s board and the CEO’s back ground.
Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
