In This Article:
If you are currently a shareholder in HEG Limited (NSEI:HEG), 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. Today we will examine HEG’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. View our latest analysis for HEG
What is free cash flow?
HEG’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 HEG to continue to grow, or at least, maintain its current operations. The two ways to assess whether HEG’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, HEG also generates a positive free cash flow. However, the yield of 0.83% is not sufficient to compensate for the level of risk investors are taking on. This is because HEG’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
What’s the cash flow outlook for HEG?
Does HEG’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 couple of years, HEG’s operating cash flows is expected to more than double from the current level of ₹1.63B, which is highly optimistic, so long as capital expenditure doesn’t ramp up by even more. Although this seems impressive, breaking down into year-on-year growth rates, HEG’s operating cash flow growth is expected to decline from a rate of 305.01% in the upcoming year, to 48.45% by the end of the third year.
Next Steps:
Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto HEG relative to a well-diversified market index. However, the high growth in operating cash flow may change the tides in the future. Now you know to keep cash flows in mind, I recommend you continue to research HEG to get a better picture of the company by looking at: