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Two important questions to ask before you buy I G Petrochemicals Limited (NSE:IGPL) 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 IGPL’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 I G Petrochemicals
Is I G Petrochemicals generating enough cash?
Free cash flow (FCF) is the amount of cash I G Petrochemicals has left after it pays off its expenses, including its net capital expenditures, which is what the company needs to spend each year to maintain or grow its business operations.
The two ways to assess whether I G Petrochemicals’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, I G Petrochemicals also generates a positive free cash flow. However, the yield of 2.34% is not sufficient to compensate for the level of risk investors are taking on. This is because I G Petrochemicals’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Is I G Petrochemicals’s yield sustainable?
Can IGPL improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. In the next couple of years, the company is expected to grow its cash from operations at a low single-digit rate of 2.7%, increasing from its current levels of ₹2.0b to ₹2.1b. Furthermore, breaking down growth into a year on year basis, IGPL is able to increase its growth rate each year, from -8.1% next year, to 12% in the following year. The overall future outlook seems relatively optimistic if IGPL can maintain its levels of capital expenditure as well.
Next Steps:
The company’s low yield relative to the market index means you are taking on more risk holding the single-stock I G Petrochemicals as opposed to the diversified market portfolio, and also being compensated for less. Furthermore, its muted operating cash flow growth doesn’t seem appealing. 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 I G Petrochemicals to get a more holistic view of the company by looking at: