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Two important questions to ask before you buy China Isotope & Radiation Corporation (HKG:1763) is, how it makes money and how it spends its cash. 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 1763’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 China Isotope & Radiation
Is China Isotope & Radiation generating enough cash?
China Isotope & Radiation’s free cash flow (FCF) is the level of cash flow the business generates from its operational activities, after it reinvests in the company as capital expenditure. This type of expense is needed for China Isotope & Radiation to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of China Isotope & Radiation’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
Although, China Isotope & Radiation generate sufficient cash from its operational activities, its FCF yield of 5.1% 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.
What’s the cash flow outlook for China Isotope & Radiation?
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 1763’s expected operating cash flows. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 51%, ramping up from its current levels of CN¥515m to CN¥778m in two years’ time. Furthermore, breaking down growth into a year on year basis, 1763 is able to increase its growth rate each year, from 18% next year, to 28% in the following year. The overall future outlook seems buoyant if 1763 can maintain its levels of capital expenditure as well.
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The yield you receive on China Isotope & Radiation is in-line with that of holding the broader market index. But, in saying this, investors are taking on more risk by buying one single stock as opposed to a diversified market portfolio, but they are being compensated at the same level. Not the best deal! 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 China Isotope & Radiation to get a better picture of the company by looking at: