STMicroelectronics N.V. (EPA:STM) 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 STMicroelectronics’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.
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What is free cash flow?
Free cash flow (FCF) is the amount of cash STMicroelectronics has left after it pays off its expenses, including its net capital expenditures, which is what the company needs to spend each year to maintain or grow its business operations.
I will be analysing STMicroelectronics’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
The business reinvests all its cash profits as well as borrows more money, to maintain and grow the company. This leads to a negative FCF, as well as negative FCF yield, in which case is not a very useful measure.
Does STMicroelectronics have a favourable cash flow trend?
Can STMicroelectronics improve its operating cash production in the future? Let’s take a quick look at the cash flow trend STMicroelectronics is expected to deliver over time. Over the next three years, STMicroelectronics’s operating cash flows is expected to grow by a double-digit 19%, which is encouraging, should capital expenditure levels maintain at an appropriate level. Below is a table of STMicroelectronics’s operating cash flow in the past year, as well as the anticipated level going forward.| Current | +1 year | +2 year | +3 year | |
|---|---|---|---|---|
| Operating Cash Flow (OCF) | US$2.1b | US$2.0b | US$2.2b | US$2.5b |
| OCF Growth Year-On-Year | -4.0% | 10% | 13% | |
| OCF Growth From Current Year | 5.8% | 19% |
Next Steps:
Now you know to keep cash flows in mind, I suggest you continue to research STMicroelectronics to get a more holistic view of the company by looking at:
- Valuation: What is STM 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 STM 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 STMicroelectronics’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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.