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If you are currently a shareholder in Carborundum Universal Limited (NSE:CARBORUNIV), 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. Today we will examine CARBORUNIV’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you.
See our latest analysis for Carborundum Universal
What is free cash flow?
Carborundum Universal 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 Carborundum Universal’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, Carborundum Universal also generates a positive free cash flow. However, the yield of 1.43% is not sufficient to compensate for the level of risk investors are taking on. This is because Carborundum Universal’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Does Carborundum Universal have a favourable cash flow trend?
Can CARBORUNIV 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. In the next couple of years, the company is expected to grow its cash from operations at a double-digit rate of 68%, ramping up from its current levels of ₹2.1b to ₹3.6b in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, CARBORUNIV’s operating cash flow growth is expected to decline from a rate of 47% next year, to 14% in the following year. But the overall future outlook seems buoyant if CARBORUNIV can maintain its levels of capital expenditure as well.
Next Steps:
Although its positive operating cash flow, and high future growth, is appealing, the low free cash flow yield is unattractive. This is because you would be better compensated in terms of cash yield, by investing in the market index, as well as take on lower diversification risk. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I recommend you continue to research Carborundum Universal to get a more holistic view of the company by looking at: