If you are currently a shareholder in Fisher & Paykel Healthcare Corporation Limited (NZSE:FPH), 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, Fisher & Paykel Healthcare is currently valued at NZ$6.8b. I’ve analysed below, the health and outlook of Fisher & Paykel Healthcare’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 Fisher & Paykel Healthcare’s cash yield?
Free cash flow (FCF) is the amount of cash Fisher & Paykel Healthcare 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 Fisher & Paykel Healthcare’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
Fisher & Paykel Healthcare’s yield of 2.13% 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 Fisher & Paykel Healthcare but are not being adequately rewarded for doing so.
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. In the next couple of years, a double-digit growth in operating cash of 11% 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$253m||NZ$287m|
|OCF Growth Year-On-Year||-2.3%||13%|
|OCF Growth From Current Year||11%|
The company’s low yield relative to the market index means you are taking on more risk holding the single-stock Fisher & Paykel Healthcare 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. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. I recommend you continue to research Fisher & Paykel Healthcare to get a better picture 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.
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.