Two important questions to ask before you buy GAIL (India) Limited (NSE:GAIL) is, how it makes money and how it spends its cash. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. I will take you through GAIL’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.
What is free cash flow?
GAIL (India) generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short.
There are two methods I will use to evaluate the quality of GAIL (India)’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
Although, GAIL (India) generate sufficient cash from its operational activities, its FCF yield of 6.07% is roughly in-line with the broader market’s high single-digit yield. This means investors are being compensated at the same level as they would be if they just held the well-diversified market index.
Is GAIL (India)’s yield sustainable?
Does GAIL’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 couple of years, GAIL is expected to deliver a decline in operating cash flow compared to the most recent level of ₹87.7b, which is not an encouraging sign. However, breaking down growth into a year on year basis, GAIL ‘s negative growth rate improves each year, from -20% in the upcoming year, to 3.2% by the end of the third year.
GAIL (India)’s free cash flow yield suggests you are not being compensated over and above the market index, although you are taking on more risk investing in a single stock. In addition to this, its negative operating cash flow growth outlook is unappealing. Now you know to keep cash flows in mind, You should continue to research GAIL (India) to get a more holistic view of the company by looking at:
- Valuation: What is GAIL 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 GAIL 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 GAIL (India)’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 email@example.com.