If you are currently a shareholder in Elos Medtech AB (publ) (STO:ELOS B), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. I will take you through ELOS B’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 Elos Medtech
What is free cash flow?
Elos Medtech’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 Elos Medtech to continue to grow, or at least, maintain its current operations.
The two ways to assess whether Elos Medtech’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
Elos Medtech’s yield of 1.35% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on Elos Medtech but are not being adequately rewarded for doing so.
What’s the cash flow outlook for Elos Medtech?
Can ELOS B 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 couple years, the company is expected to grow its cash from operations at a double-digit rate of 68%, ramping up from its current levels of kr66m to kr111m in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, ELOS B’s operating cash flow growth is expected to decline from a rate of 33% in the upcoming year, to 17% by the end of the third year. But the overall future outlook seems buoyant if ELOS B can maintain its levels of capital expenditure as well.
Next Steps:
Given a low free cash flow yield, on the basis of cash, Elos Medtech becomes a less appealing investment. This is because you would be better compensated in terms of cash yield, by investing in the market index, as well as take on lower diversification risk. However, cash is only one aspect of investing. Now you know to keep cash flows in mind, I suggest you continue to research Elos Medtech to get a better picture of the company by looking at: