Two important questions to ask before you buy China Telecom Corporation Limited (HKG:728) 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, China Telecom is currently valued at HK$316b. I’ve analysed below, the health and outlook of China Telecom’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.
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What is free cash flow?
China Telecom’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for China Telecom to continue to grow, or at least, maintain its current operations.
The two ways to assess whether China Telecom’s FCF is sufficient, is to compare the FCF yield to the market index yield, as well as determine whether the top-line operating cash flows will continue to grow.
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
After accounting for capital expenses required to run the business, China Telecom is not able to generate positive FCF, leading to a negative FCF yield – not very useful for interpretation!
Is China Telecom’s yield sustainable?
China Telecom’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. In the next couple of years, a growth of low single-digit 3.5% isn’t exciting, but it may be adequate, so long as capital expenditure doesn’t ramp up by even more. Below is a table of China Telecom’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¥100b | CN¥98b | CN¥104b |
| OCF Growth Year-On-Year | -2.1% | 5.8% | |
| OCF Growth From Current Year | 3.5% |
Next Steps:
Now you know to keep cash flows in mind, I recommend you continue to research China Telecom to get a more holistic view of the company by looking at:
- Valuation: What is 728 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 728 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 China Telecom’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.