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Two important questions to ask before you buy Xinyi Glass Holdings Limited (HKG:868) 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, 868 is currently valued at HK$37b. Today we will examine 868’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 Xinyi Glass Holdings generating enough cash?
Free cash flow (FCF) is the amount of cash Xinyi Glass 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.
I will be analysing Xinyi Glass Holdings’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
Along with a positive operating cash flow, Xinyi Glass Holdings also generates a positive free cash flow. However, the yield of 3.05% is not sufficient to compensate for the level of risk investors are taking on. This is because Xinyi Glass Holdings’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Is Xinyi Glass Holdings's yield sustainable?
Can 868 improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. In the next couple of years, the company is expected to grow its cash from operations at a low single-digit rate of 4.5%, increasing from its current levels of HK$5.1b to HK$5.3b in three years’ time. Furthermore, breaking down growth into a year on year basis, 868 is able to increase its growth rate each year, from -21% in the upcoming year, to 4.1% by the end of the third year. The overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Four words – low yield, negative growth. Xinyi Glass Holdings doesn’t jump out to me as an exciting new investment for you. If you buy the stock, you’re taking on higher risk relative to holding the market index, and further, you are being compensated for less. Now you know to keep cash flows in mind, You should continue to research Xinyi Glass Holdings to get a better picture of the company by looking at:
- Valuation: What is 868 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 868 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 Xinyi Glass 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.