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Ambuja Cements Limited (NSE:AMBUJACEM) shareholders, and potential investors, need to understand how much cash the business makes from its core operational activities, as well as how much is invested back into the business. This difference directly flows down to how much the stock is worth. Operating in the industry, AMBUJACEM is currently valued at ₹467b. I will take you through AMBUJACEM’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 Ambuja Cements
What is Ambuja Cements's cash yield?
Ambuja Cements’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 Ambuja Cements to continue to grow, or at least, maintain its current operations.
I will be analysing Ambuja Cements’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
Ambuja Cements’s yield of 1.39% 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 Ambuja Cements but are not being adequately rewarded for doing so.
Is Ambuja Cements's yield sustainable?
Can AMBUJACEM 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. Over the next couple years, the company is expected to grow its cash from operations at a double-digit rate of 19%, ramping up from its current levels of ₹17b to ₹20b in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, AMBUJACEM's operating cash flow growth is expected to decline from a rate of 18% in the upcoming year, to -0.4% by the end of the third year. But the overall future outlook seems buoyant if AMBUJACEM can maintain its levels of capital expenditure as well.