Before Investing In CRA International, Inc. (NASDAQ:CRAI), Consider This
Two important questions to ask before you buy CRA International, Inc. (NASDAQ:CRAI) 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 industry, CRAI is currently valued at US$351m. I will take you through CRAI’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.
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Is CRA International generating enough cash?
CRA International generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short.
The two ways to assess whether CRA International’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
Along with a positive operating cash flow, CRA International also generates a positive free cash flow. However, the yield of 3.8% is not sufficient to compensate for the level of risk investors are taking on. This is because CRA International’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
What’s the cash flow outlook for CRA International?
Does CRAI’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 couple of years, the company is expected to grow its cash from operations at a double-digit rate of 54%, ramping up from its current levels of US$30m to US$46m in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, CRAI’s operating cash flow growth is expected to decline from a rate of 39% next year, to 11% in the following year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto CRA International relative to a well-diversified market index. However, the high growth in operating cash flow may change the tides in the future. 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 CRA International to get a more holistic view of the company by looking at:
Valuation: What is CRAI 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 CRAI 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 CRA International’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 editorial-team@simplywallst.com.
