Two important questions to ask before you buy Cranswick plc (LON:CWK) is, how it makes money and how it spends its cash. 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 CWK’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.

View our latest analysis for Cranswick

What is free cash flow?

Cranswick’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 Cranswick to continue to grow, or at least, maintain its current operations.

The two ways to assess whether Cranswick’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

Along with a positive operating cash flow, Cranswick also generates a positive free cash flow. However, the yield of 2.39% is not sufficient to compensate for the level of risk investors are taking on. This is because Cranswick’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 Cranswick?

Can CWK 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 20%, ramping up from its current levels of US$112m to US$134m in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, CWK’s operating cash flow growth is expected to decline from a rate of 10% in the upcoming year, to 2.2% by the end of the third year. But the overall future outlook seems buoyant if CWK can maintain its levels of capital expenditure as well.

Next Steps:

Although its positive operating cash flow, and high future growth, is appealing, the low free cash flow yield is unattractive. 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. Now you know to keep cash flows in mind, I recommend you continue to research Cranswick to get a better picture of the company by looking at: