Two important questions to ask before you buy Vtech Holdings Limited (HKG:303) 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 communications equipment industry, Vtech Holdings is currently valued at HK$22.7b. I’ve analysed below, the health and outlook of Vtech Holdings’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?
Vtech Holdings 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.
I will be analysing Vtech Holdings’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
Along with a positive operating cash flow, Vtech Holdings also generates a positive free cash flow. However, the yield of 0.37% is not sufficient to compensate for the level of risk investors are taking on. This is because Vtech Holdings’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Does Vtech Holdings have a favourable cash flow trend?Can Vtech Holdings improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. In the next few years, Vtech Holdings’s operating cash flows is expected to grow by a double-digit 54%, which is encouraging, should capital expenditure levels maintain at an appropriate level. Below is a table of Vtech Holdings’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$176m||US$248m||US$261m||US$270m|
|OCF Growth Year-On-Year||41%||5.3%||3.3%|
|OCF Growth From Current Year||49%||54%|
The company’s low yield relative to the market index means you are taking on more risk holding the single-stock Vtech Holdings as opposed to the diversified market portfolio, and being compensated for less. Though the high operating cash flow growth in the future could change this. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. You should continue to research Vtech Holdings to get a more holistic view of the company by looking at:
- Valuation: What is 303 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 303 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 Vtech Holdings’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.