Two important questions to ask before you buy HCL Technologies Limited (NSE:HCLTECH) 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 it consulting and other services industry, HCL Technologies is currently valued at US$1.34t. I’ve analysed below, the health and outlook of HCL Technologies’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?Free cash flow (FCF) is the amount of cash HCL Technologies has left after it pays off its expenses, including its net capital expenditures, which is what the company needs to spend each year to maintain or grow its business operations. The two ways to assess whether HCL Technologies’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
HCL Technologies’s yield of 0.030% 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 HCL Technologies but are not being adequately rewarded for doing so.
Is HCL Technologies’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 HCL Technologies’s expected operating cash flows. In the next couple of years, a double-digit growth in operating cash of 31.17% is expected. The future seems buoyant if HCL Technologies can maintain its levels of capital expenditure as well. Below is a table of HCL Technologies’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$1.35b||US$1.53b||US$1.64b||US$1.76b|
|OCF Growth Year-On-Year||14.01%||6.67%||7.86%|
|OCF Growth From Current Year||21.61%||31.17%|
Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto HCL Technologies 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, You should continue to research HCL Technologies to get a more holistic view of the company by looking at:
- Valuation: What is HCLTECH 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 HCLTECH 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 HCL Technologies’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.