Two important questions to ask before you buy Hebei Construction Group Corporation Limited (HKG:1727) 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. Today we will examine 1727’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 Hebei Construction Group generating enough cash?
Hebei Construction Group’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 Hebei Construction Group to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of Hebei Construction 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
After accounting for capital expenses required to run the business, Hebei Construction Group is not able to generate positive FCF, leading to a negative FCF yield – not very useful for interpretation!
Does Hebei Construction Group have a favourable cash flow trend?
Hebei Construction Group’s FCF may be negative today, but is operating cash flows expected to improve in the future? Let’s examine the cash flow trend the company is anticipated to produce over time. Over the next few years, 1727’s operating cash flows is expected to more than double from the current level of CN¥497m, which is highly optimistic, so long as capital expenditure doesn’t ramp up by even more. Furthermore, breaking down growth into a year-on-year basis, 1727 is expected to be able to increase its growth rate consistently, going forward.
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 Hebei Construction Group to get a more holistic view of the company by looking at:
- Historical Performance: What has 1727’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Hebei Construction 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.