Williams-Sonoma, Inc. (NYSE:WSM) 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. This difference directly flows down to how much the stock is worth. Operating in the industry, Williams-Sonoma is currently valued at US$4.4b. I will take you through Williams-Sonoma’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.
Is Williams-Sonoma generating enough cash?
Free cash flow (FCF) is the amount of cash Williams-Sonoma 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 Williams-Sonoma’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
Although, Williams-Sonoma generate sufficient cash from its operational activities, its FCF yield of 8.69% is roughly in-line with the broader market’s high single-digit yield. This means investors are being compensated at the same level as they would be if they just held the well-diversified market index.
What’s the cash flow outlook for Williams-Sonoma?Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at Williams-Sonoma’s expected operating cash flows. In the next couple of years, Williams-Sonoma’s operating cash flows is expected to grow by 7.8%, which is encouraging, should capital expenditure levels maintain at an appropriate level. Below is a table of Williams-Sonoma’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$586m||US$536m||US$599m||US$632m|
|OCF Growth Year-On-Year||-8.6%||12%||5.5%|
|OCF Growth From Current Year||2.2%||7.8%|
Williams-Sonoma is compensating investors at a cash yield similar to the wider market portfolio. But holding the stock on its own is riskier than investing in the diversified market, which means the yield is not that attractive on a risk-return basis. 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 Williams-Sonoma to get a more holistic view of the company by looking at:
- Valuation: What is WSM 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 WSM 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 Williams-Sonoma’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.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.