The KEYW Holding Corporation’s (NASDAQ:KEYW) Most Important Factor To Consider
The KEYW Holding Corporation (NASDAQ:KEYW) 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. 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 KEYW’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. View our latest analysis for KEYW Holding
What is free cash flow?
KEYW Holding 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. I will be analysing KEYW Holding’s FCF by looking at its FCF yield and its operating cash flow growth. The yield will tell us whether the stock is generating enough cash to compensate for the risk investors take on by holding a single stock, which I will compare to the market index. The growth will proxy for sustainability levels of this cash generation.
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
KEYW Holding’s yield of 1.13% 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 KEYW Holding but are not being adequately rewarded for doing so.
Is KEYW’s yield sustainable?
Does KEYW’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 this case, analysts have only forecasted operating cash growth for one year, which makes it difficult to assess sustainability. However, just looking at the upcoming year outlook, a double-digit growth in operating cash of 82.88% is expected. The future seems buoyant if KEYW can maintain its levels of capital expenditure as well.
What this means for you:
Are you a shareholder? Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto KEYW Holding relative to a well-diversified market index. Though the high operating cash flow growth in the future could change this, I recommend you revisit its investment case. Has anything fundamental changed? If so, consider whether KEYW Holding is worth holding onto as an investment.
Are you a potential investor? Given a low free cash flow yield, on the basis of cash, KEYW Holding 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. However, cash is only one aspect of investing. If you’re interested in KEYW Holding, dig deeper into other fundamentals such as financial leverage and intrinsic valuation.
So, what is KEYW Holding actually worth? At the share price of $5.9, find out whether it is currently undervalued at a glance in our FREE easy-to-understand infographics report. Not interested in KEYW Holding anymore? How about checking out hidden opportunities in high-growth and undervalued stocks here.
To help readers see pass 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.
