If you are currently a shareholder in Whirlpool of India Limited (NSE:WHIRLPOOL), 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 household appliances industry, WHIRLPOOL is currently valued at ₹186.9b. Today we will examine WHIRLPOOL’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.

See our latest analysis for Whirlpool of India

Is Whirlpool of India generating enough cash?

Whirlpool of India 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.

The two ways to assess whether Whirlpool of 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, Whirlpool of India also generates a positive free cash flow. However, the yield of 1.49% is not sufficient to compensate for the level of risk investors are taking on. This is because Whirlpool of India’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.

Is Whirlpool of India’s yield sustainable?

Does WHIRLPOOL’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 63%, ramping up from its current levels of ₹3.8b to ₹6.3b in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, WHIRLPOOL’s operating cash flow growth is expected to decline from a rate of 33% 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:

Given a low free cash flow yield, on the basis of cash, Whirlpool of India becomes a less appealing investment. 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. Now you know to keep cash flows in mind, I suggest you continue to research Whirlpool of India to get a more holistic view of the company by looking at: