Can Cash Flows be the Path to Better Valuations? - Chart Of The Day 9 April 2019 - Equitymaster

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Can Cash Flows be the Path to Better Valuations?
Apr 9, 2019

HUL generated free cash flows of more than Rs 123 bn in the last three years and paid dividends of Rs 130 bn during the same period.

Nestle earned free cash flows of more than Rs 39 bn in the last three years, out of which it has paid dividends of Rs 22 bn. The remaining amount has gone into its investments and cash balance.

It is no wonder then that these FMCG majors fetch steep valuations due to the consistency and nature of their free cash flows.

As the capex cycle turns, there would be hundreds of companies that are profitable. Yet they may not have the funds to undertake capacity expansion due to poor cash flows. Some may be bearing the burden of a high working capital cycle. Others may be servicing debt.

So even as you look for profitable businesses that could ride the economic and policy tailwinds, pay attention to cash flows.

There are plenty of businesses outside the FMCG sector that have strong cash flows consistently. And are yet to fetch the valuations that they deserve.

Data Source: Ace Equity

This Chart Of The Day was published in The 5 Minute WrapUp - Stocks that Could Be Out of Reach Post Elections

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