Yahoo Finance Why You Should Care About Smiths Group plc’s (LON:SMIN) Cash Levels
Smiths Group plc (LON:SMIN) 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. Today we will examine SMIN’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you.
See our latest analysis for Smiths Group
What is Smiths Group’s cash yield?
Free cash flow (FCF) is the amount of cash Smiths Group 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 Smiths Group’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
Smiths Group’s yield of 5.74% 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 Smiths Group is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
Does Smiths Group have a favourable cash flow trend?
Can SMIN improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. Over the next few years, the company is expected to grow its cash from operations at a double-digit rate of 19.4%, ramping up from its current levels of UK£413.0m to UK£493.3m in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, SMIN’s operating cash flow growth is expected to decline from a rate of 12.2% next year, to 6.5% in the following year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
The yield you receive on Smiths Group is in-line with that of holding the broader market index. But, in saying this, investors are taking on more risk by buying one single stock as opposed to a diversified market portfolio, but they are being compensated at the same level. Not the best deal! 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 Smiths Group to get a more holistic view of the company by looking at:
Valuation: What is SMIN 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 SMIN 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 Smiths Group’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 editorial-team@simplywallst.com.
