If you are currently a shareholder in Giordano International Limited (HKG:709), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. 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 709’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.
Is Giordano International generating enough cash?
Free cash flow (FCF) is the amount of cash Giordano International 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 Giordano International’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
Giordano International’s yield of 10.47% last year indicates its ability to produce cash well-above the market index, given the size of the company. This means investors are adequately rewarded for the risk they take on by overweighting Giordano International.
Does Giordano International 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 709’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 12%, ramping up from its current levels of HK$665m to HK$743m in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, 709’s operating cash flow growth is expected to decline from a rate of 7.0% next year, to 4.5% in the following year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Giordano International provides an attractive cash yield above the market, as well as a strong future cash flow outlook, which reinforces the impression that it is a strong investment case. Now you know to keep cash flows in mind, I recommend you continue to research Giordano International to get a better picture of the company by looking at:
- Valuation: What is 709 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 709 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 Giordano International’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.