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Two important questions to ask before you buy California Water Service Group (NYSE:CWT) is, how it makes money and how it spends its cash. 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 CWT’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.
What is California Water Service Group’s cash yield?
California Water Service Group’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 California Water Service Group to continue to grow, or at least, maintain its current operations.
The two ways to assess whether California Water Service Group’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
The business reinvests all its cash profits as well as borrows more money, to maintain and grow the company. This leads to a negative FCF, as well as negative FCF yield, in which case is not a very useful measure.
Is California Water Service Group’s yield sustainable?
Can California Water Service Group improve its operating cash production in the future? Let’s take a quick look at the cash flow trend California Water Service Group is expected to deliver over time. In the next couple of years, the company is expected to grow its cash from operations at a double-digit rate of 28%, ramping up from its current levels of US$158m to US$202m in three years’ time. Furthermore, breaking down growth into a year on year basis, CWT is able to increase its growth rate each year, from 9.1% in the upcoming year, to 18% by the end of the third year. The overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
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 California Water Service Group to get a more holistic view of the company by looking at:
- Historical Performance: What has CWT’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 California Water Service Group’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 email@example.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.