Two important questions to ask before you buy CK Hutchison Holdings Limited (HKG:1) is, how it makes money and how it spends its cash. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. I’ve analysed below, the health and outlook of 1’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 CK Hutchison Holdings
What is free cash flow?
CK Hutchison Holdings’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 CK Hutchison Holdings to continue to grow, or at least, maintain its current operations.
The two ways to assess whether CK Hutchison Holdings’s FCF is sufficient, is to compare the FCF yield to the market index yield, as well as determine whether the top-line operating cash flows will continue to grow.
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
CK Hutchison Holdings’s yield of 0.12% 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 CK Hutchison Holdings but are not being adequately rewarded for doing so.
Is CK Hutchison Holdings’s yield sustainable?
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 1’s expected operating cash flows. In the next couple of years, the company is expected to grow its cash from operations at a double-digit rate of 47%, ramping up from its current levels of HK$52.8b to HK$77.3b in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, 1’s operating cash flow growth is expected to decline from a rate of 37% next year, to 7.0% in the following year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
Although its positive operating cash flow, and high future growth, is appealing, the low free cash flow yield is unattractive. 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. However, cash is only one aspect of investing. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I recommend you continue to research CK Hutchison Holdings to get a better picture of the company by looking at: