If you are currently a shareholder in Haier Electronics Group Co Ltd (HKG:1169), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. I’ve analysed below, the health and outlook of 1169’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 Haier Electronics Group
Is Haier Electronics Group generating enough cash?
Haier Electronics Group 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.
The two ways to assess whether Haier Electronics Group’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
Along with a positive operating cash flow, Haier Electronics Group also generates a positive free cash flow. However, the yield of 1.91% is not sufficient to compensate for the level of risk investors are taking on. This is because Haier Electronics Group’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 Haier Electronics Group?
Does 1169’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, the company is expected to grow its cash from operations at a double-digit rate of 23.1%, ramping up from its current levels of CN¥4.17b to CN¥5.14b in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, 1169’s operating cash flow growth is expected to decline from a rate of 16.0% next year, to 6.1% in the following year. But the overall future outlook seems buoyant if 1169 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 Haier Electronics Group 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 recommend you continue to research Haier Electronics Group to get a more holistic view of the company by looking at: