Two important questions to ask before you buy AK Medical Holdings Limited (HKG:1789) is, how it makes money and how it spends its cash. This difference directly flows down to how much the stock is worth. Operating in the industry, AK Medical Holdings is currently valued at HK$4.4b. I’ve analysed below, the health and outlook of AK Medical Holdings’s cash flow, which will help you understand the stock from a cash standpoint. Cash is an important concept to grasp as an investor, as it directly impacts the value of your shares and the future growth potential of your portfolio.
What is AK Medical Holdings’s cash yield?
Free cash flow (FCF) is the amount of cash AK Medical Holdings 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.
There are two methods I will use to evaluate the quality of AK Medical Holdings’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
AK Medical Holdings’s yield of 1.57% 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 AK Medical Holdings but are not being adequately rewarded for doing so.
Does AK Medical Holdings have a favourable cash flow trend?Does AK Medical Holdings’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 few years, a double-digit growth in operating cash of 94% is expected. The future seems buoyant if AK Medical Holdings can maintain its levels of capital expenditure as well. Below is a table of AK Medical Holdings’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)||CN¥135m||CN¥183m||CN¥261m|
|OCF Growth Year-On-Year||36%||43%|
|OCF Growth From Current Year||94%|
Although its positive operating cash flow, and high future growth, is appealing, the low free cash flow yield is unattractive. 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 recommend you continue to research AK Medical Holdings to get a better picture of the company by looking at:
- Valuation: What is 1789 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 1789 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 AK Medical Holdings’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 firstname.lastname@example.org.