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Schneider Electric SE (EPA:SU) 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. 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 SU’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.
See our latest analysis for Schneider Electric
What is Schneider Electric’s cash yield?
Schneider 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 Schneider Electric to continue to grow, or at least, maintain its current operations.
The two ways to assess whether Schneider 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
Schneider Electric’s yield of 6.05% 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 Schneider Electric is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
Does Schneider Electric have a favourable cash flow trend?
Does SU’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 double-digit rate of 31%, ramping up from its current levels of €2.7b to €3.6b in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, SU’s operating cash flow growth is expected to decline from a rate of 21% next year, to 7.8% in the following year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
The yield you receive on Schneider Electric is in-line with that of holding the broader market index. However, you are taking on more risk by holding a single-stock rather than the well-diversified market index. This means, in terms of risk and return, it’s not the best deal. 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 Schneider Electric to get a more holistic view of the company by looking at: