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If you are currently a shareholder in Greaves Cotton Limited (NSE:GREAVESCOT), 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 GREAVESCOT’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 Greaves Cotton
Is Greaves Cotton generating enough cash?
Free cash flow (FCF) is the amount of cash Greaves Cotton 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 Greaves Cotton’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
Although, Greaves Cotton generate sufficient cash from its operational activities, its FCF yield of 8.64% is roughly in-line with the broader market’s high single-digit yield. This means investors are being compensated at the same level as they would be if they just held the well-diversified market index.
Does Greaves Cotton have a favourable cash flow trend?
Does GREAVESCOT’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 few years, GREAVESCOT is expected to deliver a decline in operating cash flow compared to the most recent level of ₹2.8b, which is not an encouraging sign. However, breaking down growth into a year on year basis, GREAVESCOT ‘s negative growth rate improves each year, from -18% next year, to 18% in the following year.
Next Steps:
The company’s average yield compared to the market index means you are taking on more risk holding the single-stock Greaves Cotton as opposed to the diversified market portfolio. In addition to this, the negative growth outlook for operating cash flows is discouraging. Now you know to keep cash flows in mind, I suggest you continue to research Greaves Cotton to get a better picture of the company by looking at: