Aqua America Inc (NYSE:WTR): How Much Money Comes Back To Investors?
If you are currently a shareholder in Aqua America Inc (NYSE:WTR), 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 WTR’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 Aqua America
What is free cash flow?
Free cash flow (FCF) is the amount of cash Aqua America 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 Aqua America’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, Aqua America is not able to generate positive FCF, leading to a negative FCF yield – not very useful for interpretation!
Does Aqua America have a favourable cash flow trend?
Aqua America’s FCF may be negative today, but is operating cash flows expected to improve in the future? Let’s examine the cash flow trend the company is anticipated to produce over time. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 15%, ramping up from its current levels of US$394m to US$451m in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, WTR’s operating cash flow growth is expected to decline from a rate of 7.4% next year, to 6.7% in the following year. But the overall future outlook seems buoyant if WTR can maintain its levels of capital expenditure as well.
Next Steps:
Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I recommend you continue to research Aqua America to get a more holistic view of the company by looking at:
Historical Performance: What has WTR’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 Aqua America’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.
