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Two important questions to ask before you buy Emerson Electric Co. (NYSE:EMR) is, how it makes money and how it spends its cash. This difference directly flows down to how much the stock is worth. Operating in the industry, EMR is currently valued at US$43b. Today we will examine EMR’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 Emerson Electric's cash yield?
Emerson Electric’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 Emerson Electric to continue to grow, or at least, maintain its current operations.
The two ways to assess whether Emerson Electric’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
Emerson Electric’s yield of 4.57% 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 Emerson Electric but are not being adequately rewarded for doing so.
What’s the cash flow outlook for Emerson Electric?
Can EMR improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 23%, ramping up from its current levels of US$2.8b to US$3.4b in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, EMR's operating cash flow growth is expected to decline from a rate of 13% next year, to 8.4% in the following year. But the overall future outlook seems buoyant if EMR can maintain its levels of capital expenditure as well.
Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto Emerson Electric relative to a well-diversified market index. However, the high growth in operating cash flow may change the tides in the future. Now you know to keep cash flows in mind, You should continue to research Emerson Electric to get a better picture of the company by looking at:
- Valuation: What is EMR 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 EMR 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 Emerson Electric’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.