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Persistent Systems Limited (NSE:PERSISTENT) 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. I’ve analysed below, the health and outlook of PERSISTENT’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.
See our latest analysis for Persistent Systems
Is Persistent Systems generating enough cash?
Persistent Systems’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 Persistent Systems to continue to grow, or at least, maintain its current operations.
The two ways to assess whether Persistent Systems’s FCF is sufficient, is to compare the FCF yield to the market index yield, as well as determine whether the top-line operating cash flows will continue to grow.
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
Persistent Systems’s yield of 10.74% last year indicates its ability to produce cash well-above the market index, given the size of the company. This means investors are adequately rewarded for the risk they take on by overweighting Persistent Systems.
Is Persistent Systems’s yield sustainable?
Does PERSISTENT’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. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 21%, ramping up from its current levels of ₹4.3b to ₹5.2b in two years’ time. Furthermore, breaking down growth into a year on year basis, PERSISTENT is able to increase its growth rate each year, from -0.4% next year, to 22% in the following year. The overall future outlook seems buoyant if PERSISTENT can maintain its levels of capital expenditure as well.
Next Steps:
Not only does Persistent Systems offer a yield above the market index, its operating cash flow growth in the short run further strengthens its case as a solid company to invest in going forward. Now you know to keep cash flows in mind, I suggest you continue to research Persistent Systems to get a more holistic view of the company by looking at: