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If you are currently a shareholder in Kajaria Ceramics Limited (NSE:KAJARIACER), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. I’ve analysed below, the health and outlook of KAJARIACER’s cash flow, which will help you understand the stock from a cash standpoint. Cash is an important concept to grasp as an investor, as it directly impacts the value of your shares and the future growth potential of your portfolio.
Check out our latest analysis for Kajaria Ceramics
What is free cash flow?
Kajaria Ceramics’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 Kajaria Ceramics to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of Kajaria Ceramics’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
Kajaria Ceramics’s yield of 0.69% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on Kajaria Ceramics but are not being adequately rewarded for doing so.
What’s the cash flow outlook for Kajaria Ceramics?
Does KAJARIACER’s future look brighter in terms of its ability to generate higher operating cash flows? This can be estimated by examining the trend of the company’s operating cash flow moving forward. Over the next couple years, the company is expected to grow its cash from operations at a double-digit rate of 80%, ramping up from its current levels of ₹2.4b to ₹4.3b in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, KAJARIACER’s operating cash flow growth is expected to decline from a rate of 46% in the upcoming year, to 17% by the end of the third year. But the overall future outlook seems buoyant if KAJARIACER can maintain its levels of capital expenditure as well.
Next Steps:
Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto Kajaria Ceramics 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 suggest you continue to research Kajaria Ceramics to get a better picture of the company by looking at: