If you are currently a shareholder in Jiangsu Expressway Company Limited (HKG:177), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. This difference directly flows down to how much the stock is worth. Operating in the industry, Jiangsu Expressway is currently valued at HK$55b. Today we will examine Jiangsu Expressway’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.
What is free cash flow?
Jiangsu Expressway 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.
The two ways to assess whether Jiangsu Expressway’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
Jiangsu Expressway’s yield of 0.37% 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 Jiangsu Expressway but are not being adequately rewarded for doing so.
Is Jiangsu Expressway’s yield sustainable?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 Jiangsu Expressway’s expected operating cash flows. In the next few years, Jiangsu Expressway’s operating cash flows is expected to grow by a low 2.1%, which may be sufficient if capital expenditure levels are below this. Below is a table of Jiangsu Expressway’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¥5.5b||CN¥5.5b||CN¥5.6b|
|OCF Growth Year-On-Year||-0.8%||3.0%|
|OCF Growth From Current Year||2.1%|
Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto Jiangsu Expressway relative to a well-diversified market index. Moreover, the stock’s low growth prospects in terms of cash flow, seems worrisome. Now you know to keep cash flows in mind, I recommend you continue to research Jiangsu Expressway to get a more holistic view of the company by looking at:
- Valuation: What is 177 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 177 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 Jiangsu Expressway’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.