Yahoo Finance Does Power Assets Holdings Limited (HKG:6) Generate Enough Cash?
Power Assets Holdings Limited (HKG:6) shareholders, and potential investors, need to understand how much cash the business makes from its core operational activities, as well as how much is invested back into the business. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. Today we will examine 6’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.
See our latest analysis for Power Assets Holdings
What is free cash flow?
Free cash flow (FCF) is the amount of cash Power Assets 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 Power Assets 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, Power Assets Holdings also generates a positive free cash flow. However, the yield of 0.53% is not sufficient to compensate for the level of risk investors are taking on. This is because Power Assets Holdings’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Is Power Assets Holdings’s yield sustainable?
Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at 6’s expected operating cash flows. In the next couple of years, expected growth for 6’s operating cash is negative, with operating cash flows expected to decline from its current level of HK$1.25b. This is unfavourable to its future outlook, especially if capital expenditure heads the opposite direction. Breaking down operating cash growth into a year-on-year basis, it seems like 6 will face a continued decline in growth rates, from -9.9% next year, to -13.6% in the following year.
Next Steps:
The company’s low yield relative to the market index means you are taking on more risk holding the single-stock Power Assets Holdings as opposed to the diversified market portfolio, and also being compensated for less. Furthermore, its declining operating cash flow doesn’t seem appealing. Now you know to keep cash flows in mind, You should continue to research Power Assets Holdings to get a more holistic view of the company by looking at:
Valuation: What is 6 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 6 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 Power Assets 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.
