Zhongsheng Group Holdings Limited (HKG:881) 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. 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 881’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 Zhongsheng Group Holdings

What is free cash flow?

Free cash flow (FCF) is the amount of cash Zhongsheng Group 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 Zhongsheng Group 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

The business reinvests all its cash profits as well as borrows more money, to maintain and grow the company. This leads to a negative FCF, as well as negative FCF yield, in which case is not a very useful measure.

Does Zhongsheng Group Holdings have a favourable cash flow trend?

Does Zhongsheng Group Holdings’s future look brighter in terms of its ability to generate higher operating cash flows? This can be estimated by examining the trend of the company’s operating cash flow going forward. In the next couple of years, the company is expected to grow its cash from operations at a double-digit rate of 34.31%, ramping up from its current levels of CN¥4.39b to CN¥5.89b in two years’ time. Furthermore, breaking down growth into a year on year basis, 881 is able to increase its growth rate each year, from 5.61% next year, to 27.17% in the following year. The overall future outlook seems buoyant if 881 can maintain its levels of capital expenditure as well.

Next Steps:

Now you know to keep cash flows in mind, I recommend you continue to research Zhongsheng Group Holdings to get a more holistic view of the company by looking at: