China Gas Holdings Limited (HKG:384) 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. I’ve analysed below, the health and outlook of 384’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 China Gas Holdings

Is China Gas Holdings generating enough cash?

China Gas Holdings 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.

I will be analysing China Gas Holdings’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

After accounting for capital expenses required to run the business, China Gas Holdings is not able to generate positive FCF, leading to a negative FCF yield – not very useful for interpretation!

What’s the cash flow outlook for China Gas Holdings?

China Gas Holdings’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. Over the next couple years, the company is expected to grow its cash from operations at a double-digit rate of 89.5%, ramping up from its current levels of HK$6.45b to HK$12.22b in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, 384’s operating cash flow growth is expected to decline from a rate of 37.3% in the upcoming year, to 23.2% by the end of the third year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.

Next Steps:

Now you know to keep cash flows in mind, You should continue to research China Gas Holdings to get a more holistic view of the company by looking at:

1. Valuation: What is 384 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 384 is currently mispriced by the market.

2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on China Gas Holdings’s board and the CEO’s back ground.

3. 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.