Crompton Greaves Consumer Electricals Limited (NSE:CROMPTON): The Yield That Matters The Most
Two important questions to ask before you buy Crompton Greaves Consumer Electricals Limited (NSE:CROMPTON) 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. Today we will examine CROMPTON’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 Crompton Greaves Consumer Electricals
Is Crompton Greaves Consumer Electricals generating enough cash?
Free cash flow (FCF) is the amount of cash Crompton Greaves Consumer Electricals 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 Crompton Greaves Consumer Electricals’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
Crompton Greaves Consumer Electricals’s yield of 1.87% 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 Crompton Greaves Consumer Electricals but are not being adequately rewarded for doing so.
What’s the cash flow outlook for Crompton Greaves Consumer Electricals?
Can CROMPTON 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 72%, ramping up from its current levels of ₹3.2b to ₹5.4b in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, CROMPTON’s operating cash flow growth is expected to decline from a rate of 44% next year, to 19% in the following year. But the overall future outlook seems buoyant if CROMPTON can maintain its levels of capital expenditure as well.
Next Steps:
Given a low free cash flow yield, on the basis of cash, Crompton Greaves Consumer Electricals 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 recommend you continue to research Crompton Greaves Consumer Electricals to get a more holistic view of the company by looking at:
Valuation: What is CROMPTON worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CROMPTON is currently mispriced by the market.
Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Crompton Greaves Consumer Electricals’s board and the CEO’s back ground.
Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.