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If you are currently a shareholder in Stamps.com Inc. ( NASDAQ:STMP ), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. 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 STMP’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.
What is free cash flow?
Free cash flow (FCF) is the amount of cash Stamps.com 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 Stamps.com’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
Stamps.com’s yield of 3.91% 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 Stamps.com but are not being adequately rewarded for doing so.
Does Stamps.com have a favourable cash flow trend?
Can STMP improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 24%, ramping up from its current levels of US$209m to US$259m in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, STMP’s operating cash flow growth is expected to decline from a rate of 13% next year, to 9.8% in the following year. But the overall future outlook seems buoyant if STMP can maintain its levels of capital expenditure as well.
The company’s low yield relative to the market index means you are taking on more risk holding the single-stock Stamps.com as opposed to the diversified market portfolio, and being compensated for less. Though the high operating cash flow growth in the future could change this. Now you know to keep cash flows in mind, I recommend you continue to research Stamps.com to get a more holistic view of the company by looking at:
- Valuation : What is STMP 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 STMP 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 Stamps.com’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 .
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com . This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. On rare occasion, data errors may occur. Thank you for reading.