If you are currently a shareholder in CRH Medical Corporation (TSE:CRH), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. Today we will examine CRH Medical’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.
Is CRH Medical generating enough cash?
CRH Medical’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 CRH Medical to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of CRH Medical’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
CRH Medical’s yield of 11.82% 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 CRH Medical.
What’s the cash flow outlook for CRH Medical?Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at CRH Medical’s expected operating cash flows. Over the next two years, a double-digit growth in operating cash of 33% is expected. The future seems buoyant if CRH Medical can maintain its levels of capital expenditure as well. Below is a table of CRH Medical’s operating cash flow in the past year, as well as the anticipated level going forward.
|Current||+1 year||+2 year|
|Operating Cash Flow (OCF)||US$43m||US$53m||US$58m|
|OCF Growth Year-On-Year||21%||9.6%|
|OCF Growth From Current Year||33%|
CRH Medical provides an attractive cash yield above the market, as well as a strong future cash flow outlook, which reinforces the impression that it is a strong investment case. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I suggest you continue to research CRH Medical to get a more holistic view of the company by looking at:
- Valuation: What is CRH 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 CRH 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 CRH Medical’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.