If you are currently a shareholder in Franklin Electric Co., Inc. (NASDAQ:FELE), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. I will take you through Franklin Electric’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.
What is free cash flow?
Franklin Electric 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 Franklin 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
Along with a positive operating cash flow, Franklin Electric also generates a positive free cash flow. However, the yield of 3.76% is not sufficient to compensate for the level of risk investors are taking on. This is because Franklin Electric’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Does Franklin Electric have a favourable cash flow trend?Does Franklin Electric’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 few years, a double-digit growth in operating cash of 21% is expected. The future seems buoyant if Franklin Electric can maintain its levels of capital expenditure as well. Below is a table of Franklin Electric’s operating cash flow in the past year, as well as the anticipated level going forward.
|Current||+1 year||+2 year|
|Operating Cash Flow (OCF)||US$128m||US$130m||US$156m|
|OCF Growth Year-On-Year||0.9%||20%|
|OCF Growth From Current Year||21%|
Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto Franklin Electric relative to a well-diversified market index. However, the high growth in operating cash flow may change the tides in the future. 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 Franklin Electric to get a more holistic view of the company by looking at:
- Valuation: What is FELE 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 FELE 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 Franklin Electric’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 email@example.com. 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.