Should Investors Be Happy About Check Point Software Technologies Ltd.’s (NASDAQ:CHKP) Cash Levels?
Want to participate in a research study? Help shape the future of investing tools and earn a $60 gift card!
Two important questions to ask before you buy Check Point Software Technologies Ltd. (NASDAQ:CHKP) is, how it makes money and how it spends its cash. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. Today we will examine CHKP’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.
See our latest analysis for Check Point Software Technologies
Is Check Point Software Technologies generating enough cash?
Check Point Software Technologies 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 Check Point Software Technologies’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
Check Point Software Technologies’s yield of 6.2% 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 Check Point Software Technologies is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
Does Check Point Software Technologies 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 CHKP’s expected operating cash flows. In the next couple of years, the company is expected to grow its cash from operations at a single-digit rate of 7.9%, increasing from its current levels of US$1.1b to US$1.2b in three years’ time. Furthermore, breaking down growth into a year on year basis, CHKP is able to increase its growth rate each year, from -1.4% in the upcoming year, to 4.6% by the end of the third year. The overall future outlook seems buoyant if CHKP can maintain its levels of capital expenditure as well.
Next Steps:
Check Point Software Technologies 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 suggest you continue to research Check Point Software Technologies to get a more holistic view of the company by looking at:
Valuation: What is CHKP 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 CHKP 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 Check Point Software Technologies’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 editorial-team@simplywallst.com. 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.
