Have You Considered This Before Investing In China Resources Beer (Holdings) Company Limited (HKG:291)?
Two important questions to ask before you buy China Resources Beer (Holdings) Company Limited (HKG:291) is, how it makes money and how it spends its cash. This difference directly flows down to how much the stock is worth. Operating in the industry, 291 is currently valued at HK$88b. I will take you through 291’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.
View our latest analysis for China Resources Beer (Holdings)
What is China Resources Beer (Holdings)’s cash yield?
China Resources Beer (Holdings)’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 China Resources Beer (Holdings) to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of China Resources Beer (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
China Resources Beer (Holdings)’s yield of 3.37% 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 China Resources Beer (Holdings) but are not being adequately rewarded for doing so.
What’s the cash flow outlook for China Resources Beer (Holdings)?
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 291’s expected operating cash flows. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 14%, ramping up from its current levels of CN¥4.6b to CN¥5.2b in two years’ time. Furthermore, breaking down growth into a year on year basis, 291 is able to increase its growth rate each year, from 1.9% next year, to 12% in the following year. The overall future outlook seems buoyant if 291 can maintain its levels of capital expenditure as well.
Next Steps:
Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto China Resources Beer (Holdings) relative to a well-diversified market index. However, the high growth in operating cash flow may change the tides in the future. Now you know to keep cash flows in mind, I suggest you continue to research China Resources Beer (Holdings) to get a more holistic view of the company by looking at:
Valuation: What is 291 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 291 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 Resources Beer (Holdings)’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.
