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If you are currently a shareholder in Want Want China Holdings Limited (HKG:151), 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, 151 is currently valued at HK$78b. I’ve analysed below, the health and outlook of 151’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.
See our latest analysis for Want Want China Holdings
Is Want Want China Holdings generating enough cash?
Free cash flow (FCF) is the amount of cash Want Want China Holdings 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.
There are two methods I will use to evaluate the quality of Want Want China Holdings’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
Along with a positive operating cash flow, Want Want China Holdings also generates a positive free cash flow. However, the yield of 4.53% is not sufficient to compensate for the level of risk investors are taking on. This is because Want Want China Holdings’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 Want Want China Holdings?
Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at 151’s expected operating cash flows. Over the next few years, the company is expected to grow its cash from operations at a double-digit rate of 16%, ramping up from its current levels of CN¥3.8b to CN¥4.4b in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, 151’s operating cash flow growth is expected to decline from a rate of 9.3% next year, to 6.0% in the following year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.