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HRnetGroup Limited (SGX:CHZ) shareholders, and potential investors, need to understand how much cash the business makes from its core operational activities, as well as how much is invested back into the business. This difference directly flows down to how much the stock is worth. Operating in the industry, CHZ is currently valued at S$800m. Today we will examine CHZ’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 HRnetGroup
What is free cash flow?
HRnetGroup 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.
There are two methods I will use to evaluate the quality of HRnetGroup’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
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
HRnetGroup’s yield of 10.04% 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 HRnetGroup.
Is HRnetGroup’s yield sustainable?
Can CHZ 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 few years, the company is expected to grow its cash from operations at a double-digit rate of 24%, ramping up from its current levels of S$52m to S$64m in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, CHZ’s operating cash flow growth is expected to decline from a rate of 37% in the upcoming year, to 5.0% by the end of the third year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
Not only does HRnetGroup offer a yield above the market index, its operating cash flow growth in the short run further strengthens its case as a solid company to invest in going forward. Now you know to keep cash flows in mind, I recommend you continue to research HRnetGroup to get a more holistic view of the company by looking at: