Though most investors like to keep an eye on a company’s revenue and profit growth, a business’s cash flow is actually the critical aspect to monitor. As cash is the lifeblood of any business, it’s important for investors to ensure that the companies they invest in generate consistent and healthy levels of free cash flow.
Essentially, free cash flow (FCF) is defined as the cash left over after the business spends on capital expenditure (capex). FCF adds to the cash on the balance sheet and allows the business to reinvest the cash in various ways to further grow the business. Some options may be for the company to undertake a merger and acquisition (M&A) transaction, pay out dividends, or conduct share buybacks.
When a company has excess cash flow, it’s a happy problem for investors. Though cash piling up generates low returns compared to when the cash is invested, it’s a much more favourable situation compared to companies with high levels of debt that are beholden to the banks for funding their operations.
Here are three companies that generate copious amounts of FCF.
1. VICOM Limited
VICOM Limited (SGX: V01) is a leading testing and inspection company. The group performs mandatory testing services for vehicles in Singapore and has a greater than 75% market share of the vehicular testing market. In addition, VICOM also conducts testing and inspection services for mechanical, biochemical, and non-destructive testing.
The above table shows that VICOM has consistently generated high levels of FCF, apart from 2018, when it spent S$23.1 million to acquire a new property for its headquarters. This has continued on into H1 2019 as well, with FCF of close to S$14 million.
2. Straco Corporation Limited
Straco Corporation Limited (SGX: S85) is an operator of tourism assets. The group owns two aquariums in China as well as 90% of the Singapore Flyer in Singapore. It also owns the Lixing Cable Car attraction in Xi’An province, China, as well as the rights to develop the Chao Yuan Ge heritage site.
Straco has a strong track record of FCF generation, with all five years between 2014 and 2018 registering positive FCF. 2018 saw a dip to S$47.2 million as a result of the Singapore Flyer undergoing repairs and maintenance for two months. H1 2019 continues this trend of FCF generation with S$21.7 million generated.
3. Singapore Exchange Limited
Singapore Exchange Limited (SGX: S68), or SGX, is Singapore’s sole stock exchange operator. The group runs a platform for the buying and selling of securities such as equities, fixed income, derivatives, and foreign exchange. SGX also provides listing, clearance, and settlement services for listed companies.
SGX has a track record of very consistent FCF generation, as evidenced by the table above. This has enabled the group to pay steadily increasing dividends and also have sufficient cash for growing its derivatives business along with boosting its other divisions.
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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore has recommended shares of VICOM Limited, Straco Corporation Limited, and Singapore Exchange Limited. Motley Fool Singapore contributor Royston Yang owns shares in VICOM Limited, Straco Corporation Limited, and Singapore Exchange Limited.
Motley Fool Singapore 2019