Why You Should Care About ePlus inc.’s (NASDAQ:PLUS) Cash Levels

If you are currently a shareholder in ePlus inc. (NASDAQ:PLUS), 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. Today we will examine PLUS’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 ePlus

Is ePlus generating enough cash?

ePlus generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short.

The two ways to assess whether ePlus’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

ePlus’s yield of 3.14% 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 ePlus but are not being adequately rewarded for doing so.

More

Is ePlus’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 PLUS’s expected operating cash flows. In the next couple of years, the company is expected to grow its cash from operations at a double-digit rate of 34%, ramping up from its current levels of US$52m to US$70m in two years’ time. Furthermore, breaking down growth into a year on year basis, PLUS is able to increase its growth rate each year, from -9.6% next year, to 49% in the following year. The overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.

Next Steps:

The company’s low yield relative to the market index means you are taking on more risk holding the single-stock ePlus 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 ePlus to get a more holistic view of the company by looking at:

1. Valuation: What is PLUS 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 PLUS is currently mispriced by the market.
2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on ePlus’s board and the CEO’s back ground.
3. 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 [email protected].