Stock Analysis

    Are Cubic Corporation (NYSE:CUB) Shareholders Getting A Good Deal?

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    If you are currently a shareholder in Cubic Corporation (NYSE:CUB), 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 Cubic’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 Cubic

    What is free cash flow?

    Free cash flow (FCF) is the amount of cash Cubic 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. The two ways to assess whether Cubic’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, Cubic also generates a positive free cash flow. However, the yield of 4.07% is not sufficient to compensate for the level of risk investors are taking on. This is because Cubic’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.

    NYSE:CUB Net Worth Jan 2nd 18
    NYSE:CUB Net Worth Jan 2nd 18

    What’s the cash flow outlook for Cubic?

    Can Cubic 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, Cubic’s operating cash flows is expected to more than double, which is highly optimistic, so long as capital expenditure doesn’t ramp up by even more. Below is a table of Cubic’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)$25M$38M$105M
    OCF Growth Year-On-Year53.62%176.32%
    OCF Growth From Current Year324.48%

    What this means for you:

    Are you a shareholder? Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto Cubic relative to a well-diversified market index. However, the high growth in operating cash flow may change the tides in the future. I recommend you revisit its investment case. Has anything fundamental changed? If so, consider whether Cubic is worth holding onto as an investment.

    Are you a potential investor? 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. However, cash is only one aspect of investing. If Cubic has been on your watchlist for a while, there is more research to be done! I recommend considering other fundamentals such as its balance sheet health and valuation as part of your due diligence.

    Interested in learning more about Cubic's fundamentals? To quickly understand whether it is a good investment for you, scroll through our FREE easy-to-understand infographics report. If you're curious about other attractive investments, explore our list of high-growth and undervalued stocks here.

    Valuation is complex, but we're helping make it simple.

    Find out whether is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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    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.