Xylem Inc (XYL)

Conclusion

Xylem Inc designs, manufactures and services water and wastewater equipment, including pumps, filtration and treatment systems, smart meters and monitoring software, for utility, industrial and building customers. At 99.26 USD on 2026-11-09, the shares give a market capitalisation of 22.76 billion USD and an enterprise value of 24.95 billion USD.

The verdict is fair. Today's price-to-earnings ratio of 21.2 sits well below its ten-year median of 37.1, and enterprise value to EBITDA of 12.9 compares with a median of 20.5. The discounted cash flow gives 77.19 USD per share at a discount rate of 9.86%. The fair value band runs from 96.43 to 144.64 USD, with a midpoint of 120.53 USD and a margin of safety of 21.4% at the current price. The reverse DCF implies growth of 11.1% a year, against a five-year revenue CAGR of 13.1% and a five-year free cash flow per share CAGR of 1.1%.

Three numbers hold the case up: net debt to EBITDA of 1.13x, interest coverage of 36.3x and an Altman Z-score of 3.20. Three numbers weaken it: return on invested capital of 8.9% sits just below the WACC of 9.2%, the share count has grown at 6.1% a year over five years, and next-year EPS estimates have fallen 4.7% over the last 90 days.

Financial health

The financial strength colour is green, supported by net debt to EBITDA of 1.13x, interest coverage of 36.3x, a current ratio of 1.39 and an Altman Z-score of 3.20. The quick ratio is 0.94 and debt to equity is 0.28, so the balance sheet is not reliant on short-term funding. The Altman model was designed mainly for manufacturers. Xylem is an equipment maker, so the model fits reasonably well here, and its Z-score sits in the safe zone. Insolvency risk: low, about 0.1% by the estimate of the Ohlson model over one to two years. Debt has fallen 21.2% a year over the last five years on an annual basis, which further lowers the pressure on cash flow.

Earnings quality

The earnings quality colour is yellow. Free cash flow conversion is strong at 96.9% over five years, but it has eased to 85.8% on a trailing twelve-month basis. The accrual ratio of -1.7% is favourable, because reported earnings are backed by cash. Stock-based compensation is 0.6% of revenue, leaving free cash flow after stock compensation at 866 million USD. The share count has grown 6.1% a year over five years, which is the main weakness. The Piotroski score is 6 out of 9. The Beneish M-score value is not available in the data, so its reading cannot be assessed. The company beat earnings expectations in 7 of the last 8 quarters, with an average surprise of 5.6%. Estimate revisions are negative: current-year EPS estimates are down 4.0% over 90 days, and next-year estimates are down 4.7%.

Profitability

The profitability colour is green. The operating margin is 15.2%, against a ten-year median of 11.3%, and the net margin is 11.9%, against a median of 7.9%. The gross margin of 39.8% is above its median of 38.2%. The operating margin stability figure is 0.1588. Return on invested capital is 8.9%, with a five-year median of 8.1%, against a WACC of 9.2%. The given ROIC minus WACC value is -0.3%, rated neutral. The DuPont split shows a net margin of 10.6%, an asset turnover of 0.51x and an equity multiplier of 1.54x. Return on equity of 10.5% therefore comes mainly from margins, not from leverage.

Growth

The growth colour is green. Revenue has compounded at 17.8% over three years, 13.1% over five years and 9.5% over ten years. Earnings per share have compounded at 26.0%, 22.8% and 7.7% over the same periods. Free cash flow per share grew 20.3% over three years but only 1.1% over five years, and 6.9% over ten. Revenue grew in 9 of the last 10 years. Analysts expect next-year EPS to rise 8.7%, a figure that is lower than the recent three-year pace.

Valuation

The valuation colour is yellow. The price-to-earnings ratio of 21.2 is 42.8% below its ten-year median of 37.1, and the price to book ratio of 2.22 is 54.0% below its median of 4.82. Enterprise value to EBITDA of 12.9 is 37.3% below its median of 20.5. The discounted cash flow gives 77.19 USD per share, using a discount rate of 9.86%, a first-stage growth rate of 9.5% and a terminal growth rate of 2.5%. The terminal value makes up 54.0% of that figure. The fair value from historical multiples is 163.87 USD. The fair value band runs from 96.43 to 144.64 USD with a midpoint of 120.53 USD, and the margin of safety is 21.4%. The reverse DCF implies growth of 11.1% a year. The dividend yield is 1.8%, and dividends absorb 44.0% of free cash flow.

Risks

A fall in return on invested capital below the cost of capital would reduce the value the company creates from its investments, and it is already only slightly below the WACC. Continued share issuance at 6.1% a year would dilute existing shareholders. Falling estimate revisions could signal weaker earnings ahead, and the reverse DCF already assumes 11.1% growth, above the free cash flow per share growth of 1.1% over five years. The discounted cash flow depends heavily on the terminal value, at 54.0% of its result, and the fair value band rests on fixed assumptions rather than a forecast. The Beneish M-score value is not available. This analysis has no debt maturity schedule and no revenue breakdown by segment, so refinancing timing and the performance of individual businesses cannot be assessed.