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Electricité de France SA (EPA:EDF) 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’ve analysed below, the health and outlook of EDF’s cash flow, which will help you understand the stock from a cash standpoint. Cash is an important concept to grasp as an investor, as it directly impacts the value of your shares and the future growth potential of your portfolio.
Check out our latest analysis for Electricité de France
Is Electricité de France generating enough cash?
Electricité de France 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.
The two ways to assess whether Electricité de France’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
Electricité de France’s yield of 12.47% last year indicates its ability to produce cash well-above the market index, given the size of the company. This means investors are adequately rewarded for the risk they take on by overweighting Electricité de France.
Does Electricité de France have a favourable cash flow trend?
Can EDF 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, expected growth for EDF’s operating cash is negative, with operating cash flows expected to decline from its current level of €15.4b. This is unfavourable to its future outlook, especially if capital expenditure heads the opposite direction. However, breaking down growth into a year on year basis, EDF ‘s negative growth rate improves each year, from -16% in the upcoming year, to 2.6% by the end of the third year.
Next Steps:
Although Electricité de France provides an attractive cash flow yield relative to the market index, its expected negative cash flow growth raises concerns around whether this yield is sustainable. Now you know to keep cash flows in mind, You should continue to research Electricité de France to get a more holistic view of the company by looking at: