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If you are currently a shareholder in Kirloskar Oil Engines Limited (NSE:KIRLOSENG), 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. I will take you through KIRLOSENG’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.
Check out our latest analysis for Kirloskar Oil Engines
Is Kirloskar Oil Engines generating enough cash?
Free cash flow (FCF) is the amount of cash Kirloskar Oil Engines has left after it pays off its expenses, including its net capital expenditures, which is what the company needs to spend each year to maintain or grow its business operations.
The two ways to assess whether Kirloskar Oil Engines’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
After accounting for capital expenses required to run the business, Kirloskar Oil Engines is not able to generate positive FCF, leading to a negative FCF yield – not very useful for interpretation!
Is Kirloskar Oil Engines’s yield sustainable?
Kirloskar Oil Engines’s FCF may be negative today, but is operating cash flows expected to improve in the future? Let’s examine the cash flow trend the company is anticipated to produce over time. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 87%, ramping up from its current levels of ₹1.4b to ₹2.6b in two years’ time. Furthermore, breaking down growth into a year on year basis, KIRLOSENG is able to increase its growth rate each year, from 12% next year, to 66% in the following year. The overall future outlook seems buoyant if KIRLOSENG can maintain its levels of capital expenditure as well.
Next Steps:
Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I suggest you continue to research Kirloskar Oil Engines to get a more holistic view of the company by looking at:
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Valuation: What is KIRLOSENG worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether KIRLOSENG is currently mispriced by the market.
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Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Kirloskar Oil Engines’s board and the CEO’s back ground.
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Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.