Are Pharmagest Interactive SA (EPA:PHA) Shareholders Getting A Good Deal?

If you are currently a shareholder in Pharmagest Interactive SA (EPA:PHA), 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, Pharmagest Interactive is currently valued at €861m. Today we will examine Pharmagest Interactive’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.

See our latest analysis for Pharmagest Interactive

What is free cash flow?

Free cash flow (FCF) is the amount of cash Pharmagest Interactive has left after it pays off its expenses, including its net capital expenditures, which is what the company needs to spend each year to maintain or grow its business operations.

The two ways to assess whether Pharmagest Interactive’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

Pharmagest Interactive’s yield of 3.17% 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 Pharmagest Interactive but are not being adequately rewarded for doing so.

ENXTPA:PHA Balance Sheet Net Worth, April 5th 2019
ENXTPA:PHA Balance Sheet Net Worth, April 5th 2019

Is Pharmagest Interactive’s yield sustainable?

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 Pharmagest Interactive’s expected operating cash flows. Over the next three years, a double-digit growth in operating cash of 30% is expected. The future seems buoyant if Pharmagest Interactive can maintain its levels of capital expenditure as well. Below is a table of Pharmagest Interactive’s operating cash flow in the past year, as well as the anticipated level going forward.
Current +1 year +2 year +3 year
Operating Cash Flow (OCF) €33m €35m €41m €43m
OCF Growth Year-On-Year 5.7% 15% 6.9%
OCF Growth From Current Year 22% 30%

Next Steps:

The company’s low yield relative to the market index means you are taking on more risk holding the single-stock Pharmagest Interactive as opposed to the diversified market portfolio, and being compensated for less. Though the high operating cash flow growth in the future could change this. Now you know to keep cash flows in mind, I suggest you continue to research Pharmagest Interactive to get a more holistic view of the company by looking at:

  1. Valuation: What is PHA 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 PHA is currently mispriced by the market.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Pharmagest Interactive’s board and the CEO’s back ground.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.