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If you are currently a shareholder in Tang Palace (China) Holdings Limited (HKG:1181), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. This difference directly flows down to how much the stock is worth. Operating in the industry, 1181 is currently valued at HK$1.3b. I’ve analysed below, the health and outlook of 1181’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.
Check out our latest analysis for Tang Palace (China) Holdings
What is Tang Palace (China) Holdings’s cash yield?
Tang Palace (China) Holdings 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 Tang Palace (China) Holdings’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
Tang Palace (China) Holdings’s yield of 14.85% last year indicates its ability to produce cash well-above the market index, given the size of the company. This means investors are adequately rewarded for the risk they take on by overweighting Tang Palace (China) Holdings.
What’s the cash flow outlook for Tang Palace (China) Holdings?
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 1181’s expected operating cash flows. Over the next few years, 1181 is expected to deliver a decline in operating cash flow compared to the most recent level of CN¥204m, which is not an encouraging sign. Breaking down operating cash growth into a year-on-year basis, it seems like 1181 will face a continued decline in growth rates, from 2.7% next year, to -3.9% in the following year.
Next Steps:
Although Tang Palace (China) Holdings offers an above-average yield relative to the market index, its negative operating cash flow growth in the near-term is concerning, and makes us a cautious around the company’s future outlook. Now you know to keep cash flows in mind, You should continue to research Tang Palace (China) Holdings to get a more holistic view of the company by looking at: