Two important questions to ask before you buy C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW) is, how it makes money and how it spends its cash. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. I’ve analysed below, the health and outlook of C.H. Robinson Worldwide’s cash flow, which will help you understand the stock from a cash standpoint. Cash is an important concept to grasp as an investor, as it directly impacts the value of your shares and the future growth potential of your portfolio.
What is C.H. Robinson Worldwide’s cash yield?
C.H. Robinson Worldwide 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 C.H. Robinson Worldwide’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, C.H. Robinson Worldwide also generates a positive free cash flow. However, the yield of 4.33% is not sufficient to compensate for the level of risk investors are taking on. This is because C.H. Robinson Worldwide’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Does C.H. Robinson Worldwide have a favourable cash flow trend?Does C.H. Robinson Worldwide’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 couple of years, a double-digit growth in operating cash of 24% is expected. The future seems buoyant if C.H. Robinson Worldwide can maintain its levels of capital expenditure as well. Below is a table of C.H. Robinson Worldwide’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$695m||US$779m||US$829m||US$861m|
|OCF Growth Year-On-Year||12%||6.5%||3.8%|
|OCF Growth From Current Year||19%||24%|
Given a low free cash flow yield, on the basis of cash, C.H. Robinson Worldwide becomes a less appealing investment. 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. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I recommend you continue to research C.H. Robinson Worldwide to get a more holistic view of the company by looking at:
- Valuation: What is CHRW 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 CHRW 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 C.H. Robinson Worldwide’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.