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VIP Industries Limited (NSE:VIPIND) 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. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. I’ve analysed below, the health and outlook of VIPIND’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.
View our latest analysis for VIP Industries
What is free cash flow?
VIP Industries 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.
I will be analysing VIP Industries’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, VIP Industries also generates a positive free cash flow. However, the yield of 0.88% is not sufficient to compensate for the level of risk investors are taking on. This is because VIP Industries’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
What’s the cash flow outlook for VIP Industries?
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 VIPIND’s expected operating cash flows. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 97%, ramping up from its current levels of ₹859m to ₹1.7b in two years’ time. Furthermore, breaking down growth into a year on year basis, VIPIND is able to increase its growth rate each year, from 36% next year, to 45% in the following year. The overall future outlook seems buoyant if VIPIND can maintain its levels of capital expenditure as well.