If you are currently a shareholder in China Longyuan Power Group Corporation Limited (HKG:916), 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’ve analysed below, the health and outlook of 916’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.
What is China Longyuan Power Group’s cash yield?
China Longyuan Power Group generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short.
There are two methods I will use to evaluate the quality of China Longyuan Power Group’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.
Is China Longyuan Power Group’s yield sustainable?
Can China Longyuan Power Group improve its operating cash production in the future? Let’s take a quick look at the cash flow trend China Longyuan Power Group is expected to deliver over time. In the next couple of years, the company is expected to grow its cash from operations at a double-digit rate of 27%, ramping up from its current levels of CN¥15.0b to CN¥19.0b in three years’ time. Furthermore, breaking down growth into a year on year basis, 916 is able to increase its growth rate each year, from 7.4% in the upcoming year, to 12% by the end of the third year. The overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Now you know to keep cash flows in mind, I suggest you continue to research China Longyuan Power Group to get a better picture of the company by looking at:
- Valuation: What is 916 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 916 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 China Longyuan Power Group’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 firstname.lastname@example.org.