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If you are currently a shareholder in Jyothy Laboratories Limited (NSE:JYOTHYLAB), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. This difference directly flows down to how much the stock is worth. Operating in the industry, JYOTHYLAB is currently valued at ₹66b. I will take you through JYOTHYLAB’s cash flow health and the risk-return concept based on the stock’s cash flow yield, using the most recent financial data. This will help you think about the company from a cash perspective, which is a crucial factor to investing.
Check out our latest analysis for Jyothy Laboratories
What is free cash flow?
Jyothy Laboratories’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 Jyothy Laboratories to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of Jyothy Laboratories’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
Jyothy Laboratories’s yield of 2.9% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on Jyothy Laboratories but are not being adequately rewarded for doing so.
Is Jyothy Laboratories’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 JYOTHYLAB’s expected operating cash flows. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 23%, ramping up from its current levels of ₹2.4b to ₹3.0b in three years’ time. Furthermore, breaking down growth into a year on year basis, JYOTHYLAB is able to increase its growth rate each year, from -2.5% in the upcoming year, to 13% by the end of the third year. The overall future outlook seems buoyant if JYOTHYLAB can maintain its levels of capital expenditure as well.
Next Steps:
The company’s low yield relative to the market index means you are taking on more risk holding the single-stock Jyothy Laboratories as opposed to the diversified market portfolio, and being compensated for less. Though the high operating cash flow growth in the future could change this. Now you know to keep cash flows in mind, I suggest you continue to research Jyothy Laboratories to get a better picture of the company by looking at: