If you are currently a shareholder in Arcadis NV (AMS:ARCAD), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. 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 ARCAD’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 Arcadis generating enough cash?
Arcadis’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 Arcadis to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of Arcadis’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
Although, Arcadis generate sufficient cash from its operational activities, its FCF yield of 6.88% is roughly in-line with the broader market’s high single-digit yield. This means investors are being compensated at the same level as they would be if they just held the well-diversified market index.
Does Arcadis have a favourable cash flow trend?
Does ARCAD’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 moving forward. In the next few years, the company is expected to grow its cash from operations at a single-digit rate of 7.0%, increasing from its current levels of €174.0m to €186.2m in two years’ time. Furthermore, breaking down growth into a year on year basis, ARCAD is able to increase its growth rate each year, from 1.0% next year, to 6.0% in the following year. The overall future outlook seems buoyant if ARCAD can maintain its levels of capital expenditure as well.
Arcadis is compensating investors at a cash yield similar to the wider market portfolio. However, if you factor in the higher risk of holding just Arcadis compared to the well-diversified market index, the stock doesn’t seem as appealing. 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 Arcadis to get a better picture of the company by looking at:
- Valuation: What is ARCAD 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 ARCAD 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 Arcadis’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.