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Two important questions to ask before you buy Pinnacle West Capital Corporation (NYSE:PNW) is, how it makes money and how it spends its cash. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. I’ve analysed below, the health and outlook of Pinnacle West Capital’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 free cash flow?
Pinnacle West Capital’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 Pinnacle West Capital to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of Pinnacle West Capital’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
The business reinvests all its cash profits as well as borrows more money, to maintain and grow the company. This leads to a negative FCF, as well as negative FCF yield, in which case is not a very useful measure.
Is Pinnacle West Capital’s yield sustainable?Does Pinnacle West Capital’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 going forward. Over the next three years, Pinnacle West Capital’s operating cash flows is expected to grow by a low 1.0%, which may be sufficient if capital expenditure levels are below this. Below is a table of Pinnacle West Capital’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$1.3b||US$1.2b||US$1.3b||US$1.3b|
|OCF Growth Year-On-Year||-4.6%||2.8%||3.1%|
|OCF Growth From Current Year||-2.0%||1.0%|
Now you know to keep cash flows in mind, I recommend you continue to research Pinnacle West Capital to get a more holistic view of the company by looking at:
- Historical Performance: What has PNW’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Pinnacle West Capital’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 firstname.lastname@example.org.