One Factor To Consider Before Investing In Johnson Electric Holdings Limited (HKG:179)
Two important questions to ask before you buy Johnson Electric Holdings Limited (HKG:179) 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. I’ve analysed below, the health and outlook of 179’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.
Check out our latest analysis for Johnson Electric Holdings
Is Johnson Electric Holdings generating enough cash?
Free cash flow (FCF) is the amount of cash Johnson Electric 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 Johnson Electric 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
After accounting for capital expenses required to run the business, Johnson Electric Holdings is not able to generate positive FCF, leading to a negative FCF yield – not very useful for interpretation!
Is Johnson Electric Holdings’s yield sustainable?
Can Johnson Electric Holdings improve its operating cash production in the future? Let’s take a quick look at the cash flow trend Johnson Electric Holdings 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 39%, ramping up from its current levels of US$401m to US$557m in three years’ time. Furthermore, breaking down growth into a year on year basis, 179 is able to increase its growth rate each year, from 6.8% in the upcoming year, to 9.7% by the end of the third year. The overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I suggest you continue to research Johnson Electric Holdings to get a better picture of the company by looking at:
Valuation: What is 179 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 179 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 Johnson Electric 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.
