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If you are currently a shareholder in China Mobile Limited (HKG:941), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. Today we will examine 941’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you.
View our latest analysis for China Mobile
What is free cash flow?
China Mobile 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.
There are two methods I will use to evaluate the quality of China Mobile’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
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
The business reinvests all its cash profits as well as borrows more money, to maintain and grow the company. This leads to a negative FCF, as well as negative FCF yield, in which case is not a very useful measure.
What’s the cash flow outlook for China Mobile?
Can China Mobile improve its operating cash production in the future? Let’s take a quick look at the cash flow trend China Mobile is expected to deliver over time. In the next couple of years, the company is expected to grow its cash from operations at a double-digit rate of 12%, ramping up from its current levels of CN¥226b to CN¥253b in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, 941’s operating cash flow growth is expected to decline from a rate of 17% in the upcoming year, to -6.9% by the end of the third year. But the overall future outlook seems buoyant if 941 can maintain its levels of capital expenditure as well.
Next Steps:
Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I suggest you continue to research China Mobile to get a more holistic view of the company by looking at: