If you are currently a shareholder in Amiad Water Systems Ltd (LON:AFS), 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. I’ve analysed below, the health and outlook of AFS’s cash flow, which will help you understand the stock from a cash standpoint. Cash is an important concept to grasp as an investor, as it directly impacts the value of your shares and the future growth potential of your portfolio.
What is free cash flow?
Amiad Water Systems’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 Amiad Water Systems to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of Amiad Water Systems’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
After accounting for capital expenses required to run the business, Amiad Water Systems is not able to generate positive FCF, leading to a negative FCF yield – not very useful for interpretation!
Is Amiad Water Systems’s yield sustainable?
Can Amiad Water Systems improve its operating cash production in the future? Let’s take a quick look at the cash flow trend Amiad Water Systems is expected to deliver over time. In the next couple of years, the company is expected to grow its cash from operations at a double-digit rate of 42.8%, ramping up from its current levels of US$4.6m to US$6.5m in two years’ time. Furthermore, breaking down growth into a year on year basis, AFS is able to increase its growth rate each year, from -9.9% next year, to 58.6% in the following year. The overall future outlook seems buoyant if AFS can maintain its levels of capital expenditure as well.
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 Amiad Water Systems to get a more holistic view of the company by looking at:
- Historical Performance: What has AFS’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Amiad Water Systems’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 firstname.lastname@example.org.