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If you are currently a shareholder in CLP Holdings Limited (HKG:2), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. This difference directly flows down to how much the stock is worth. Operating in the industry, 2 is currently valued at HK$237b. I will take you through 2’s cash flow health and the risk-return concept based on the stock’s cash flow yield, using the most recent financial data. This will help you think about the company from a cash perspective, which is a crucial factor to investing.

Check out our latest analysis for CLP Holdings

What is free cash flow?

CLP 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 CLP 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

CLP Holdings’s yield of 3.41% 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 CLP Holdings but are not being adequately rewarded for doing so.

Does CLP Holdings have a favourable cash flow trend?

Can 2 improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. Over the next few years, 2 is expected to deliver a decline in operating cash flow compared to the most recent level of HK$27b, which is not an encouraging sign. However, breaking down growth into a year on year basis, 2 ‘s negative growth rate improves each year, from -18% next year, to -2.7% in the following year.

Next Steps:

CLP Holdings’s low free cash flow yield is deterring, in addition to its negative growth prospects. This means that, as an investor, you would be rewarded less than just holding a portfolio made up of all the stocks in the market, as well as taking on higher risk! Now you know to keep cash flows in mind, You should continue to research CLP Holdings to get a better picture of the company by looking at: