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BYD Electronic (International) Company Limited (HKG:285) 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. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. I will take you through 285’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.
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What is free cash flow?
Free cash flow (FCF) is the amount of cash BYD Electronic (International) 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.
I will be analysing BYD Electronic (International)’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
After accounting for capital expenses required to run the business, BYD Electronic (International) is not able to generate positive FCF, leading to a negative FCF yield – not very useful for interpretation!
Does BYD Electronic (International) have a favourable cash flow trend?
Does BYD Electronic (International)’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 going forward. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 54%, ramping up from its current levels of CN¥3.0b to CN¥4.5b in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, 285’s operating cash flow growth is expected to decline from a rate of 46% next year, to 5.3% in the following year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.