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Two important questions to ask before you buy CF Industries Holdings, Inc. (NYSE:CF) 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. I will take you through CF’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 CF Industries Holdings's cash yield?
Free cash flow (FCF) is the amount of cash CF Industries Holdings has left after it pays off its expenses, including its net capital expenditures, which is what the company needs to spend each year to maintain or grow its business operations.
I will be analysing CF Industries Holdings’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
Along with a positive operating cash flow, CF Industries Holdings also generates a positive free cash flow. However, the yield of 2.81% is not sufficient to compensate for the level of risk investors are taking on. This is because CF Industries Holdings’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Does CF Industries Holdings have a favourable cash flow trend?
Does CF’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 the next few years, the company is expected to grow its cash from operations at a low single-digit rate of 1.3%, increasing from its current levels of US$1.5b to US$1.5b in three years’ time. Although this seems relatively robust, breaking down into year-on-year growth rates, CF's operating cash flow growth is expected to decline from a rate of -0.9% in the upcoming year, to -9.0% by the end of the third year. But the overall future outlook seems relatively optimistic if CF can maintain its levels of capital expenditure as well.
Given a low free cash flow yield, on the basis of cash, CF Industries Holdings 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. 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 CF Industries Holdings to get a better picture of the company by looking at:
- Valuation: What is CF 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 CF 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 CF Industries Holdings’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 firstname.lastname@example.org. 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.