Two important questions to ask before you buy 1300SMILES Limited (ASX:ONT) 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 health care facilities industry, ONT is currently valued at AU$146m. I will take you through ONT’s cash flow health and the risk-return concept based on the stock’s cash flow yield, using the most recent financial data. This will help you think about the company from a cash perspective, which is a crucial factor to investing.
See our latest analysis for 1300SMILES
What is free cash flow?
1300SMILES generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short.
I will be analysing 1300SMILES’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, 1300SMILES also generates a positive free cash flow. However, the yield of 2.58% is not sufficient to compensate for the level of risk investors are taking on. This is because 1300SMILES’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
What’s the cash flow outlook for 1300SMILES?
Does ONT’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. Over the next couple years, the company is expected to grow its cash from operations at a double-digit rate of 23%, ramping up from its current levels of AU$10m to AU$13m in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, ONT’s operating cash flow growth is expected to decline from a rate of 3.8% in the upcoming year, to 3.7% by the end of the third year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
The company’s low yield relative to the market index means you are taking on more risk holding the single-stock 1300SMILES 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. Now you know to keep cash flows in mind, You should continue to research 1300SMILES to get a more holistic view of the company by looking at: