If you are currently a shareholder in Southwest Gas Holdings, Inc. (NYSE:SWX), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. This difference directly flows down to how much the stock is worth. Operating in the industry, SWX is currently valued at US$4.4b. I will take you through SWX’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.
What is Southwest Gas Holdings’s cash yield?
Southwest Gas Holdings’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 Southwest Gas Holdings to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of Southwest Gas Holdings’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, Southwest Gas Holdings is not able to generate positive FCF, leading to a negative FCF yield – not very useful for interpretation!
Is Southwest Gas Holdings’s yield sustainable?
Can Southwest Gas Holdings improve its operating cash production in the future? Let’s take a quick look at the cash flow trend Southwest Gas Holdings 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 17%, ramping up from its current levels of US$529m to US$619m in three years’ time. Furthermore, breaking down growth into a year on year basis, SWX is able to increase its growth rate each year, from 2.3% in the upcoming year, to 5.4% by the end of the third year. The overall future outlook seems buoyant if SWX 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. You should continue to research Southwest Gas Holdings to get a better picture of the company by looking at:
- Historical Performance: What has SWX’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 Southwest Gas Holdings’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 firstname.lastname@example.org. 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. Thank you for reading.