Two important questions to ask before you buy California Water Service Group (NYSE:CWT) is, how it makes money and how it spends its cash. This difference directly flows down to how much the stock is worth. Operating in the water utilities industry, CWT is currently valued at US$1.93b. I will take you through CWT’s cash flow health and the risk-return concept based on the stock’s cash flow yield, using the most recent financial data. This will help you think about the company from a cash perspective, which is a crucial factor to investing.
Is California Water Service Group generating enough cash?
Free cash flow (FCF) is the amount of cash California Water Service Group 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 California Water Service Group’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
The business reinvests all its cash profits as well as borrows more money, to maintain and grow the company. This leads to a negative FCF, as well as negative FCF yield, in which case is not a very useful measure.
Is California Water Service Group’s yield sustainable?
Does California Water Service Group’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 going forward. In the next couple of years, the company is expected to grow its cash from operations at a double-digit rate of 17.8%, ramping up from its current levels of US$161.7m to US$190.4m in three years’ time. Furthermore, breaking down growth into a year on year basis, CWT is able to increase its growth rate each year, from -0.9% in the upcoming year, to 12.8% by the end of the third year. The overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Now you know to keep cash flows in mind, I suggest you continue to research California Water Service Group to get a better picture of the company by looking at:
- Historical Performance: What has CWT’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 California Water Service Group’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.