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If you are currently a shareholder in Berger Paints India Limited (NSE:BERGEPAINT), 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. I’ve analysed below, the health and outlook of BERGEPAINT’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 Berger Paints India
What is free cash flow?
Berger Paints India’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 Berger Paints India to continue to grow, or at least, maintain its current operations.
The two ways to assess whether Berger Paints India’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
Along with a positive operating cash flow, Berger Paints India also generates a positive free cash flow. However, the yield of 0.31% is not sufficient to compensate for the level of risk investors are taking on. This is because Berger Paints India’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Is Berger Paints India’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 BERGEPAINT’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 76%, ramping up from its current levels of ₹4.2b to ₹7.4b in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, BERGEPAINT’s operating cash flow growth is expected to decline from a rate of 43% next year, to 23% 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. Now you know to keep cash flows in mind, I recommend you continue to research Berger Paints India to get a more holistic view of the company by looking at: