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If you are currently a shareholder in Wipro Limited (NSE:WIPRO), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. I will take you through WIPRO’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.
See our latest analysis for Wipro
What is free cash flow?
Free cash flow (FCF) is the amount of cash Wipro 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.
I will be analysing Wipro’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
Wipro’s yield of 5.48% last year indicates its ability to produce cash at the same rate as the market index, taking into account the company’s size. However, given that the risk for holding single-stock Wipro is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
Does Wipro have a favourable cash flow trend?
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 WIPRO’s expected operating cash flows. In the next couple of years, the company is expected to grow its cash from operations at a double-digit rate of 17%, ramping up from its current levels of ₹83.5b to ₹97.6b in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, WIPRO’s operating cash flow growth is expected to decline from a rate of 17% next year, to -0.3% in the following year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
Wipro is compensating investors at a cash yield similar to the wider market portfolio. However, you are taking on more risk by holding a single-stock rather than the well-diversified market index. This means, in terms of risk and return, it’s not the best deal. Now you know to keep cash flows in mind, I recommend you continue to research Wipro to get a better picture of the company by looking at: