If you are currently a shareholder in Finolex Industries Limited (NSE:FINOLEXIND), 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 commodity chemicals industry, FINOLEXIND is currently valued at US$64b. I will take you through FINOLEXIND’s cash flow health and the risk-return concept based on the stock’s cash flow yield, using the most recent financial data. This will help you think about the company from a cash perspective, which is a crucial factor to investing.
See our latest analysis for Finolex Industries
What is free cash flow?
Finolex Industries’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 Finolex Industries to continue to grow, or at least, maintain its current operations.
I will be analysing Finolex Industries’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
Finolex Industries’s yield of 1.65% 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 Finolex Industries but are not being adequately rewarded for doing so.
Does Finolex Industries have a favourable cash flow trend?
Can FINOLEXIND 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 double-digit rate of 40%, ramping up from its current levels of US$3.4b to US$4.7b in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, FINOLEXIND’s operating cash flow growth is expected to decline from a rate of 21% in the upcoming year, to 12% by the end of the third year. But the overall future outlook seems buoyant if FINOLEXIND can maintain its levels of capital expenditure as well.