Fisher & Paykel Healthcare Corporation Limited (NZSE:FPH) shareholders, and potential investors, need to understand how much cash the business makes from its core operational activities, as well as how much is invested back into the business. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. I will take you through Fisher & Paykel Healthcare’s cash flow health and the risk-return concept based on the stock’s cash flow yield, using the most recent financial data. This will help you think about the company from a cash perspective, which is a crucial factor to investing.
What is free cash flow?
Fisher & Paykel Healthcare’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 Fisher & Paykel Healthcare to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of Fisher & Paykel Healthcare’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
Along with a positive operating cash flow, Fisher & Paykel Healthcare also generates a positive free cash flow. However, the yield of 1.85% is not sufficient to compensate for the level of risk investors are taking on. This is because Fisher & Paykel Healthcare’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Does Fisher & Paykel Healthcare have a favourable cash flow trend?Does Fisher & Paykel Healthcare’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. Over the next two years, a double-digit growth in operating cash of 24% is expected. The future seems buoyant if Fisher & Paykel Healthcare can maintain its levels of capital expenditure as well. Below is a table of Fisher & Paykel Healthcare’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)||NZ$259m||NZ$264m||NZ$320m|
|OCF Growth Year-On-Year||1.9%||21%|
|OCF Growth From Current Year||24%|
Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto Fisher & Paykel Healthcare relative to a well-diversified market index. However, the high growth in operating cash flow may change the tides in the future. Now you know to keep cash flows in mind, I recommend you continue to research Fisher & Paykel Healthcare to get a more holistic view of the company by looking at:
- Valuation: What is FPH 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 FPH 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 Fisher & Paykel Healthcare’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.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.