Want to participate in a short research study? Help shape the future of investing tools and receive a $20 prize!
Hengan International Group Company Limited (HKG:1044) 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. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. I’ve analysed below, the health and outlook of Hengan International Group’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?
Hengan International 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 Hengan International 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
Hengan International Group’s yield of 3.04% 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 Hengan International Group but are not being adequately rewarded for doing so.
What’s the cash flow outlook for Hengan International Group?Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at Hengan International Group’s expected operating cash flows. Over the next two years, Hengan International Group’s operating cash flows is expected to grow by a double-digit 27%, which is encouraging, should capital expenditure levels maintain at an appropriate level. Below is a table of Hengan International 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¥3.8b||CN¥4.5b||CN¥4.9b|
|OCF Growth Year-On-Year||17%||8.5%|
|OCF Growth From Current Year||27%|
Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto Hengan International Group relative to a well-diversified market index. However, the high growth in operating cash flow may change the tides in the future. Now you know to keep cash flows in mind, I recommend you continue to research Hengan International Group to get a better picture of the company by looking at:
- Valuation: What is 1044 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 1044 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 Hengan International 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.