Want to participate in a research study? Help shape the future of investing tools and earn a $60 gift card!
If you are currently a shareholder in Xcel Energy Inc. (NASDAQ:XEL), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. This difference directly flows down to how much the stock is worth. Operating in the industry, XEL is currently valued at US$29b. Today we will examine XEL’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 Xcel Energy generating enough cash?
Xcel 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 Xcel Energy to continue to grow, or at least, maintain its current operations.
I will be analysing Xcel Energy’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
After accounting for capital expenses required to run the business, Xcel Energy is not able to generate positive FCF, leading to a negative FCF yield – not very useful for interpretation!
Is Xcel Energy's yield sustainable?
Does Xcel 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. Over the next couple years, the company is expected to grow its cash from operations at a double-digit rate of 13%, ramping up from its current levels of US$3.1b to US$3.5b in three years’ time. Furthermore, breaking down growth into a year on year basis, XEL is able to increase its growth rate each year, from -1.5% in the upcoming year, to 5.0% by the end of the third year. The overall future outlook seems buoyant if XEL can maintain its levels of capital expenditure as well.
Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I suggest you continue to research Xcel Energy to get a more holistic view of the company by looking at:
- Valuation: What is XEL 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 XEL 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 Xcel Energy’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.