Black Hills Corporation (NYSE:BKH) 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, Black Hills is currently valued at US$4.4b. I will take you through Black Hills’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?
Black Hills’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for Black Hills to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of Black Hills’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, Black Hills also generates a positive free cash flow. However, the yield of 0.69% is not sufficient to compensate for the level of risk investors are taking on. This is because Black Hills’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Does Black Hills have a favourable cash flow trend?Can Black Hills 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 couple of years, Black Hills’s operating cash flows is expected to grow by 5.2%, which is encouraging, should capital expenditure levels maintain at an appropriate level. Below is a table of Black Hills’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$489m||US$418m||US$481m||US$514m|
|OCF Growth Year-On-Year||-14%||15%||6.9%|
|OCF Growth From Current Year||-1.5%||5.2%|
The company’s low yield relative to the market index means you are taking on more risk holding the single-stock Black Hills as opposed to the diversified market portfolio, and also being compensated for less. Furthermore, its declining operating cash flow doesn’t seem appealing. 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 Black Hills to get a better picture of the company by looking at:
- Valuation: What is BKH 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 BKH 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 Black Hills’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 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.