Is Model N, Inc. (NYSE:MODN) Spending Too Much Money?

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Model N, Inc. (NYSE:MODN) 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. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. I’ve analysed below, the health and outlook of Model N’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 Model N

What is free cash flow?

Free cash flow (FCF) is the amount of cash Model N 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.

I will be analysing Model N’s FCF by looking at its FCF yield and its operating cash flow growth. The yield will tell us whether the stock is generating enough cash to compensate for the risk investors take on by holding a single stock, which I will compare to the market index. The growth will proxy for sustainability levels of this cash generation.

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, Model N also generates a positive free cash flow. However, the yield of 2% is not sufficient to compensate for the level of risk investors are taking on. This is because Model N’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.

NYSE:MODN Net Worth February 7th 19
NYSE:MODN Net Worth February 7th 19

Is Model N’s yield sustainable?

Does Model N’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 doubling in growth of operating cash flows is extremely uplifting, especially if capital expenditure grows at a lower rate. Below is a table of Model N’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$8.0m US$11m US$16m
OCF Growth Year-On-Year 43% 40%
OCF Growth From Current Year 100%

Next Steps:

Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto Model N 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 Model N to get a better picture of the company by looking at:

  1. Valuation: What is MODN 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 MODN is currently mispriced by the market.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Model N’s board and the CEO’s back ground.
  3. 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 editorial-team@simplywallst.com.