Two important questions to ask before you buy MTR Corporation Limited (HKG:66) 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 railroads industry, 66 is currently valued at HK$242.01b. I will take you through 66’s cash flow health and the risk-return concept based on the stock’s cash flow yield, using the most recent financial data. This will help you think about the company from a cash perspective, which is a crucial factor to investing.

View our latest analysis for MTR

Is MTR generating enough cash?

MTR’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 MTR to continue to grow, or at least, maintain its current operations.

I will be analysing MTR’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, MTR also generates a positive free cash flow. However, the yield of 0.69% is not sufficient to compensate for the level of risk investors are taking on. This is because MTR’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.

Does MTR have a favourable cash flow trend?

Does 66’s future look brighter in terms of its ability to generate higher operating cash flows? This can be estimated by examining the trend of the company’s operating cash flow moving forward. In the next few years, the company is expected to grow its cash from operations at a low single-digit rate of 2.78%, increasing from its current levels of HK$19.60b to HK$20.15b. Furthermore, breaking down growth into a year on year basis, 66 is able to increase its growth rate each year, from -1.52% next year, to 4.37% in the following year. The overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.

Next Steps:

Given a low free cash flow yield, on the basis of cash, MTR becomes a less appealing investment. This is because you would be better compensated in terms of cash yield, by investing in the market index, as well as take on lower diversification risk. Now you know to keep cash flows in mind, I suggest you continue to research MTR to get a more holistic view of the company by looking at: