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SmarTone Telecommunications Holdings Limited (HKG:315) 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. 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 315’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.
Check out our latest analysis for SmarTone Telecommunications Holdings
What is SmarTone Telecommunications Holdings’s cash yield?
SmarTone Telecommunications Holdings’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 SmarTone Telecommunications Holdings to continue to grow, or at least, maintain its current operations.
The two ways to assess whether SmarTone Telecommunications Holdings’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
SmarTone Telecommunications Holdings’s yield of 12.09% 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 SmarTone Telecommunications Holdings.
Does SmarTone Telecommunications Holdings have a favourable cash flow trend?
Can 315 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, 315 is expected to deliver a decline in operating cash flow compared to the most recent level of HK$2.2b, which is not an encouraging sign. However, breaking down growth into a year on year basis, 315 ‘s negative growth rate improves each year, from -11% in the upcoming year, to -6.5% by the end of the third year.
Next Steps:
Although SmarTone Telecommunications Holdings offers an above-average yield relative to the market index, its negative operating cash flow growth in the near-term is concerning, and makes us a cautious around the company’s future outlook. 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 SmarTone Telecommunications Holdings to get a better picture of the company by looking at: