If you are currently a shareholder in Vuzix Corporation (NASDAQ:VUZI), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. I will take you through VUZI’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.
What is Vuzix’s cash yield?
Vuzix’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 Vuzix to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of Vuzix’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
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 Vuzix’s yield sustainable?
Can Vuzix improve its operating cash production in the future? Let’s take a quick look at the cash flow trend Vuzix is expected to deliver over time. Over the next few years, VUZI is expected to deliver a decline in operating cash flow compared to the most recent level of -US$22.3m, which is not an encouraging sign. Breaking down operating cash growth into a year-on-year basis, it seems like VUZI will face a continued decline in growth rates, from -3.8% next year, to -35% in the following year.
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 Vuzix to get a more holistic view of the company by looking at:
- Historical Performance: What has VUZI’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 Vuzix’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.
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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.