Two important questions to ask before you buy Hebei Construction Group Corporation Limited (HKG:1727) is, how it makes money and how it spends its cash. This difference directly flows down to how much the stock is worth. Operating in the industry, Hebei Construction Group is currently valued at HK$6.7b. Today we will examine Hebei Construction Group’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.
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What is free cash flow?
Hebei Construction Group 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 Hebei Construction Group’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 Hebei Construction Group’s yield sustainable?Hebei Construction Group’s FCF may be negative today, but is operating cash flows expected to improve in the future? Let’s examine the cash flow trend the company is anticipated to produce over time. Over the next two years, Hebei Construction Group’s operating cash flows is expected to more than double, which is highly optimistic, so long as capital expenditure doesn’t ramp up by even more. Below is a table of Hebei Construction Group’s operating cash flow in the past year, as well as the anticipated level going forward.
|Current||+1 year||+2 year|
|Operating Cash Flow (OCF)||CN¥497m||CN¥529m||CN¥1.7b|
|OCF Growth Year-On-Year||6.5%||229%|
|OCF Growth From Current Year||250%|
Now you know to keep cash flows in mind, I recommend you continue to research Hebei Construction Group to get a better picture of the company by looking at:
- Historical Performance: What has 1727’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 Hebei Construction Group’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.