Two important questions to ask before you buy Kansai Nerolac Paints Limited (NSE:KANSAINER) is, how it makes money and how it spends its cash. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. I will take you through KANSAINER’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 Kansai Nerolac Paints

What is Kansai Nerolac Paints’s cash yield?

Kansai Nerolac Paints 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 Kansai Nerolac Paints’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

Along with a positive operating cash flow, Kansai Nerolac Paints also generates a positive free cash flow. However, the yield of 0.67% is not sufficient to compensate for the level of risk investors are taking on. This is because Kansai Nerolac Paints’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 Kansai Nerolac Paints?

Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at KANSAINER’s expected operating cash flows. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 75%, ramping up from its current levels of ₹3.6b to ₹6.3b in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, KANSAINER’s operating cash flow growth is expected to decline from a rate of 43% in the upcoming year, to 5.9% by the end of the third year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.

Next Steps:

Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto Kansai Nerolac Paints 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 Kansai Nerolac Paints to get a more holistic view of the company by looking at: