If you are currently a shareholder in Medidata Solutions Inc (NASDAQ:MDSO), 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 health care technology industry, Medidata Solutions is currently valued at US$4.2b. I’ve analysed below, the health and outlook of Medidata Solutions’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 Medidata Solutions’s cash yield?
Free cash flow (FCF) is the amount of cash Medidata Solutions 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 Medidata Solutions’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, Medidata Solutions also generates a positive free cash flow. However, the yield of 0.87% is not sufficient to compensate for the level of risk investors are taking on. This is because Medidata Solutions’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Is Medidata Solutions’s yield sustainable?Does Medidata Solutions’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 89% is expected. The future seems buoyant if Medidata Solutions can maintain its levels of capital expenditure as well. Below is a table of Medidata Solutions’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$87m||US$126m||US$166m|
|OCF Growth Year-On-Year||44%||32%|
|OCF Growth From Current Year||89%|
Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto Medidata Solutions 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 Medidata Solutions to get a better picture of the company by looking at:
- Valuation: What is MDSO 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 MDSO 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 Medidata Solutions’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.