Are China Maple Leaf Educational Systems Limited (HKG:1317) Shareholders Getting A Good Deal?
If you are currently a shareholder in China Maple Leaf Educational Systems Limited (HKG:1317), 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, 1317 is currently valued at HK$9.7b. Today we will examine 1317’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.
View our latest analysis for China Maple Leaf Educational Systems
What is free cash flow?
China Maple Leaf Educational Systems 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.
The two ways to assess whether China Maple Leaf Educational 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
China Maple Leaf Educational Systems’s yield of 4.92% 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 China Maple Leaf Educational Systems but are not being adequately rewarded for doing so.
What’s the cash flow outlook for China Maple Leaf Educational Systems?
Can 1317 improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. Over the next couple years, the company is expected to grow its cash from operations at a double-digit rate of 87%, ramping up from its current levels of CN¥750m to CN¥1.4b in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, 1317’s operating cash flow growth is expected to decline from a rate of 49% in the upcoming year, to 12% by the end of the third year. But the overall future outlook seems buoyant if 1317 can maintain its levels of capital expenditure as well.
Next Steps:
Given a low free cash flow yield, on the basis of cash, China Maple Leaf Educational Systems becomes a less appealing investment. This is because you would be better compensated in terms of cash yield, by investing in the market index, as well as take on lower diversification risk. However, cash is only one aspect of investing. Now you know to keep cash flows in mind, I suggest you continue to research China Maple Leaf Educational Systems to get a more holistic view of the company by looking at:
Valuation: What is 1317 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 1317 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 China Maple Leaf Educational Systems’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.
