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Williams-Sonoma, Inc. (NYSE:WSM) 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. Today we will examine WSM’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.
Is Williams-Sonoma generating enough cash?
Williams-Sonoma’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 Williams-Sonoma to continue to grow, or at least, maintain its current operations.
I will be analysing Williams-Sonoma’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
Williams-Sonoma’s yield of 6.37% last year indicates its ability to produce cash at the same rate as the market index, taking into account the company’s size. However, given that the risk for holding single-stock Williams-Sonoma is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
Does Williams-Sonoma have a favourable cash flow trend?
Does WSM’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 couple of years, the company is expected to grow its cash from operations at a low single-digit rate of 1.4%, increasing from its current levels of US$566m to US$574m in three years’ time. Furthermore, breaking down growth into a year on year basis, WSM is able to increase its growth rate each year, from -1.2% in the upcoming year, to 3.4% by the end of the third year. The overall future outlook seems relatively optimistic if WSM can maintain its levels of capital expenditure as well.
Williams-Sonoma is compensating investors at a cash yield similar to the wider market portfolio, but holding the stock on its own is riskier than investing in the diversified market, which means the yield is not that attractive on a risk-return basis. Furthermore, its declining operating cash flow doesn’t add to the investment case. Now you know to keep cash flows in mind, You should continue to research Williams-Sonoma to get a better picture of the company by looking at:
- Valuation: What is WSM 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 WSM 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 Williams-Sonoma’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.
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 firstname.lastname@example.org.