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Sundram Fasteners Limited (NSE:SUNDRMFAST) shareholders, and potential investors, need to understand how much cash the business makes from its core operational activities, as well as how much is invested back into the business. This difference directly flows down to how much the stock is worth. Operating in the auto parts and equipment industry, SUNDRMFAST is currently valued at ₹136.92b. I will take you through SUNDRMFAST’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 Sundram Fasteners
What is free cash flow?
Sundram Fasteners’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 Sundram Fasteners to continue to grow, or at least, maintain its current operations.
The two ways to assess whether Sundram Fasteners’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
Sundram Fasteners’s yield of 0.17% 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 Sundram Fasteners but are not being adequately rewarded for doing so.
Is Sundram Fasteners’s yield sustainable?
Can SUNDRMFAST 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 few years, the company is expected to grow its cash from operations at a double-digit rate of 27.7%, ramping up from its current levels of ₹4.56b to ₹5.83b in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, SUNDRMFAST’s operating cash flow growth is expected to decline from a rate of 13.8% next year, to 12.3% in the following year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
Given a low free cash flow yield, on the basis of cash, Sundram Fasteners becomes a less appealing investment. 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. However, cash is only one aspect of investing. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I suggest you continue to research Sundram Fasteners to get a better picture of the company by looking at: