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If you are currently a shareholder in KWS Saat SE (FRA:KWS), 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 KWS’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.
Is KWS Saat generating enough cash?
KWS Saat generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short.
I will be analysing KWS Saat’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, KWS Saat also generates a positive free cash flow. However, the yield of 3.77% is not sufficient to compensate for the level of risk investors are taking on. This is because KWS Saat’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
What’s the cash flow outlook for KWS Saat?
Can KWS 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. Over the next few years, the company is expected to grow its cash from operations at a low single-digit rate of 0.9%, increasing from its current levels of €155m to €157m. Furthermore, breaking down growth into a year on year basis, KWS is able to increase its growth rate each year, from -5.5% next year, to 6.8% in the following year. The overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
KWS Saat’s low free cash flow yield is deterring, in addition to its low growth prospects. This means that, as an investor, you would be rewarded less than just holding a portfolio made up of all the stocks in the market, as well as taking on higher risk! Now you know to keep cash flows in mind, You should continue to research KWS Saat to get a better picture of the company by looking at:
- Valuation: What is KWS 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 KWS 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 KWS Saat’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.