Two important questions to ask before you buy Sociedad Química y Minera de Chile SA (NYSE:SQM) is, how it makes money and how it spends its cash. This difference directly flows down to how much the stock is worth. Operating in the fertilizers and agricultural chemicals industry, Sociedad Química y Minera de Chile is currently valued at US$12.78b. I will take you through Sociedad Química y Minera de Chile’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?
Sociedad Química y Minera de Chile 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.
There are two methods I will use to evaluate the quality of Sociedad Química y Minera de Chile’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
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, Sociedad Química y Minera de Chile also generates a positive free cash flow. However, the yield of 4.72% is not sufficient to compensate for the level of risk investors are taking on. This is because Sociedad Química y Minera de Chile’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
What’s the cash flow outlook for Sociedad Química y Minera de Chile?Can Sociedad Química y Minera de Chile 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. Over the next three years, a double-digit growth in operating cash of 27.3% is expected. The future seems buoyant if Sociedad Química y Minera de Chile can maintain its levels of capital expenditure as well. Below is a table of Sociedad Química y Minera de Chile’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$766.7m||US$675.2m||US$835.5m||US$975.9m|
|OCF Growth Year-On-Year||-11.9%||23.7%||16.8%|
|OCF Growth From Current Year||9.0%||27.3%|
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. 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 Sociedad Química y Minera de Chile to get a more holistic view of the company by looking at:
- Valuation: What is SQM 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 SQM 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 Sociedad Química y Minera de Chile’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 email@example.com.