Yahoo Finance Is BWP Trust (ASX:BWP) Spending Too Much Money?
If you are currently a shareholder in BWP Trust (ASX:BWP), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. Today we will examine BWP’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you.
Check out our latest analysis for BWP Trust
Is BWP Trust generating enough cash?
Free cash flow (FCF) is the amount of cash BWP Trust 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 BWP Trust’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
BWP Trust’s yield of 1.4% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on BWP Trust but are not being adequately rewarded for doing so.
What’s the cash flow outlook for BWP Trust?
Does BWP’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. Over the next three years, the company is expected to grow its cash from operations at a low single-digit rate of 4.6%, increasing from its current levels of AU$112.8m to AU$118.0m in three years’ time. Furthermore, breaking down growth into a year on year basis, BWP is able to increase its growth rate each year, from -2.0% in the upcoming year, to 1.3% by the end of the third year. The overall future outlook seems relatively optimistic if BWP can maintain its levels of capital expenditure as well.
Next Steps:
Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto BWP Trust relative to a well-diversified market index. Moreover, the stock’s low growth prospects in terms of cash flow, seems worrisome. Now you know to keep cash flows in mind, I suggest you continue to research BWP Trust to get a more holistic view of the company by looking at:
Valuation: What is BWP 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 BWP 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 BWP Trust’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 editorial-team@simplywallst.com.
