Gujarat Gas Limited (NSE:GUJGAS) 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. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. Today we will examine GUJGAS’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.

See our latest analysis for Gujarat Gas

What is Gujarat Gas’s cash yield?

Free cash flow (FCF) is the amount of cash Gujarat Gas 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.

I will be analysing Gujarat Gas’s FCF by looking at its FCF yield and its operating cash flow growth. The yield will tell us whether the stock is generating enough cash to compensate for the risk investors take on by holding a single stock, which I will compare to the market index. The growth will proxy for sustainability levels of this cash generation.

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, Gujarat Gas also generates a positive free cash flow. However, the yield of 0.31% is not sufficient to compensate for the level of risk investors are taking on. This is because Gujarat Gas’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 Gujarat Gas?

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 GUJGAS’s expected operating cash flows. In the next couple of years, the company is expected to grow its cash from operations at a double-digit rate of 31%, ramping up from its current levels of ₹7.8b to ₹10.3b in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, GUJGAS’s operating cash flow growth is expected to decline from a rate of 33% next year, to -1.8% in the following year. But the overall future outlook seems buoyant if GUJGAS can maintain its levels of capital expenditure as well.

Next Steps:

Given a low free cash flow yield, on the basis of cash, Gujarat Gas becomes a less appealing investment. This is because you would be better compensated in terms of cash yield, by investing in the market index, as well as take on lower diversification risk. However, cash is only one aspect of investing. 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 Gujarat Gas to get a more holistic view of the company by looking at: