If you are currently a shareholder in Bajaj Auto Limited (NSE:BAJAJ-AUTO), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. Today we will examine BAJAJ-AUTO’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.

Check out our latest analysis for Bajaj Auto

What is Bajaj Auto’s cash yield?

Bajaj Auto’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 Bajaj Auto to continue to grow, or at least, maintain its current operations.

I will be analysing Bajaj Auto’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

Bajaj Auto’s yield of 4.81% 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 Bajaj Auto but are not being adequately rewarded for doing so.

Does Bajaj Auto have a favourable cash flow trend?

Does BAJAJ-AUTO’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 moving forward. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 21%, ramping up from its current levels of ₹43b to ₹52b in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, BAJAJ-AUTO’s operating cash flow growth is expected to decline from a rate of 11% next year, to 8.4% in the following year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.

Next Steps:

The company’s low yield relative to the market index means you are taking on more risk holding the single-stock Bajaj Auto as opposed to the diversified market portfolio, and being compensated for less. Though the high operating cash flow growth in the future could change this. Now you know to keep cash flows in mind, You should continue to research Bajaj Auto to get a better picture of the company by looking at: