Yahoo Finance Weichai Power Co Ltd (HKG:2338): What’s In It For The Shareholders?
If you are currently a shareholder in Weichai Power Co Ltd (HKG:2338), 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. I’ve analysed below, the health and outlook of 2338’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 Weichai Power
What is free cash flow?
Free cash flow (FCF) is the amount of cash Weichai Power 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 Weichai Power’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
In Weichai Power’s case, its strong FCF yield of 18.58% over the past year means it sufficiently compensates investors for the risk they are taking on by investing in the stock, as opposed to merely investing in the well-diversified market index.
Is Weichai Power’s yield sustainable?
Does 2338’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. Over the next few years, the company is expected to grow its cash from operations at a single-digit rate of 9.7%, increasing from its current levels of CN¥17b to CN¥18b in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, 2338’s operating cash flow growth is expected to decline from a rate of 8.8% in next year, to 0.8% in the following year. But the overall future outlook seems buoyant if 2338 can maintain its levels of capital expenditure as well.
Next Steps:
Weichai Power 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. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I recommend you continue to research Weichai Power to get a more holistic view of the company by looking at:
Valuation: What is 2338 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 2338 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 Weichai Power’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.
