If you are currently a shareholder in Sinopec Shanghai Petrochemical Company Limited (HKG:338), 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 338’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.
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What is Sinopec Shanghai Petrochemical’s cash yield?
Free cash flow (FCF) is the amount of cash Sinopec Shanghai Petrochemical 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.
I will be analysing Sinopec Shanghai Petrochemical’s FCF by looking at its FCF yield and its operating cash flow growth. The yield will tell us whether the stock is generating enough cash to compensate for the risk investors take on by holding a single stock, which I will compare to the market index. The growth will proxy for sustainability levels of this cash generation.
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
Although, Sinopec Shanghai Petrochemical generate sufficient cash from its operational activities, its FCF yield of 9.06% is roughly in-line with the broader market’s high single-digit yield. This means investors are being compensated at the same level as they would be if they just held the well-diversified market index.
Does Sinopec Shanghai Petrochemical have a favourable cash flow trend?
Does 338’s future look brighter in terms of its ability to generate higher operating cash flows? This can be estimated by examining the trend of the company’s operating cash flow moving forward. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 24%, ramping up from its current levels of CN¥5.3b to CN¥6.6b in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, 338’s operating cash flow growth is expected to decline from a rate of 14% next year, to 8.4% in the following year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Sinopec Shanghai Petrochemical’s positive operating cash flow is encouraging, and its yield is relatively similar to the market index. However, you are taking on more risk by holding a single-stock rather than the well-diversified market index. This means, in terms of risk and return, it’s not the best deal. Now you know to keep cash flows in mind, I recommend you continue to research Sinopec Shanghai Petrochemical to get a more holistic view of the company by looking at:
- Valuation: What is 338 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 338 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 Sinopec Shanghai Petrochemical’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.