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What You Need To Know About Contact Energy Limited’s (NZSE:CEN) Cash Situation

Contact Energy Limited (NZSE:CEN) 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. I’ve analysed below, the health and outlook of CEN’s cash flow, which will help you understand the stock from a cash standpoint. Cash is an important concept to grasp as an investor, as it directly impacts the value of your shares and the future growth potential of your portfolio.

Check out our latest analysis for Contact Energy

What is free cash flow?

Contact Energy’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 Contact Energy to continue to grow, or at least, maintain its current operations.

The two ways to assess whether Contact Energy’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.

NZSE:CEN Net Worth November 20th 18
NZSE:CEN Net Worth November 20th 18

Is Contact Energy’s yield sustainable?

Does Contact Energy’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 going forward. In the next few years, CEN is expected to deliver a decline in operating cash flow compared to the most recent level of NZ$457m, which is not an encouraging sign. However, breaking down growth into a year on year basis, CEN ‘s negative growth rate improves each year, from -14% in the upcoming year, to 1.8% by the end of the third year.

Next Steps:

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 Contact Energy to get a better picture of the company by looking at:

  1. Valuation: What is CEN 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 CEN is currently mispriced by the market.

  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Contact Energy’s board and the CEO’s back ground.

  3. 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.

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