If you are currently a shareholder in CIMIC Group Limited (ASX:CIM), 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. I’ve analysed below, the health and outlook of CIM’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 CIMIC Group’s cash yield?
CIMIC Group’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 CIMIC Group to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of CIMIC Group’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
CIMIC Group’s yield of 9.79% last year indicates its ability to produce cash at the same rate as the market index, taking into account the company’s size. However, given that the risk for holding single-stock CIMIC Group is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
What’s the cash flow outlook for CIMIC Group?
Can CIM improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. In the next couple of years, CIM is expected to deliver a decline in operating cash flow compared to the most recent level of AU$1.5b, which is not an encouraging sign. Breaking down operating cash growth into a year-on-year basis, it seems like CIM will face a continued decline in growth rates, from 0.5% in the upcoming year, to -14% by the end of the third year.
CIMIC Group is compensating investors at a cash yield similar to the wider market portfolio. However, you are taking on more risk by holding a single-stock rather than the well-diversified market index. This means, in terms of risk and return, it’s not the best deal. 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 CIMIC Group to get a more holistic view of the company by looking at:
- Valuation: What is CIM 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 CIM is currently mispriced by the market.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on CIMIC 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 email@example.com.