Two important questions to ask before you buy Quest Diagnostics Incorporated (NYSE:DGX) 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, Quest Diagnostics is currently valued at US$12b. I’ve analysed below, the health and outlook of Quest Diagnostics’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.
Check out our latest analysis for Quest Diagnostics
Is Quest Diagnostics generating enough cash?
Quest Diagnostics’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 Quest Diagnostics to continue to grow, or at least, maintain its current operations.
The two ways to assess whether Quest Diagnostics’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
Quest Diagnostics’s yield of 5.55% last year indicates its ability to produce cash at the same rate as the market index, taking into account the company’s size. However, given that the risk for holding single-stock Quest Diagnostics is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
What’s the cash flow outlook for Quest Diagnostics?
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 Quest Diagnostics’s expected operating cash flows. In the next few years, a double-digit growth in operating cash of 17% is expected. The future seems buoyant if Quest Diagnostics can maintain its levels of capital expenditure as well. Below is a table of Quest Diagnostics’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) | US$1.2b | US$1.3b | US$1.3b | US$1.4b |
| OCF Growth Year-On-Year | 6.8% | 1.8% | 7.7% | |
| OCF Growth From Current Year | 8.7% | 17% |
Next Steps:
The yield you receive on Quest Diagnostics is in-line with that of holding the broader market index. However, if you factor in the higher risk of holding just Quest Diagnostics compared to the well-diversified market index, the stock doesn’t seem as appealing. 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 Quest Diagnostics to get a more holistic view of the company by looking at:
- Valuation: What is DGX 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 DGX 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 Quest Diagnostics’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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