Eversource Energy (NYSE:ES) shareholders, and potential investors, need to understand how much cash the business makes from its core operational activities, as well as how much is invested back into the business. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. Today we will examine ES’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.
Is Eversource Energy generating enough cash?
Eversource Energy’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 Eversource Energy to continue to grow, or at least, maintain its current operations.
The two ways to assess whether Eversource Energy’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
Eversource Energy’s yield of 0.065% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on Eversource Energy but are not being adequately rewarded for doing so.
Does Eversource Energy have a favourable cash flow trend?
Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at ES’s expected operating cash flows. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 40%, ramping up from its current levels of US$1.8b to US$2.5b in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, ES’s operating cash flow growth is expected to decline from a rate of 21% in the upcoming year, to 5.3% by the end of the third year. But the overall future outlook seems buoyant if ES can maintain its levels of capital expenditure as well.
Given a low free cash flow yield, on the basis of cash, Eversource Energy becomes a less appealing investment. This is because you would be better compensated in terms of cash yield, by investing in the market index, as well as take on lower diversification risk. Now you know to keep cash flows in mind, I suggest you continue to research Eversource Energy to get a more holistic view of the company by looking at:
- Historical Performance: What has ES’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 Eversource Energy’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.