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If you are currently a shareholder in Globus Medical Inc (NYSE:GMED), 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. Today we will examine GMED’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.
View our latest analysis for Globus Medical
What is free cash flow?
Globus Medical’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 Globus Medical to continue to grow, or at least, maintain its current operations.
There are two methods I will use to evaluate the quality of Globus Medical’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
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
Globus Medical’s yield of 1.51% 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 Globus Medical but are not being adequately rewarded for doing so.
Does Globus Medical have a favourable cash flow trend?
Can GMED 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. In the next couple of years, the company is expected to grow its cash from operations at a double-digit rate of 37%, ramping up from its current levels of US$166m to US$227m in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, GMED’s operating cash flow growth is expected to decline from a rate of 25% next year, to 9.4% in the following year. But the overall future outlook seems buoyant if GMED can maintain its levels of capital expenditure as well.
Next Steps:
Although its positive operating cash flow, and high future growth, is appealing, the low free cash flow yield is unattractive. 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 recommend you continue to research Globus Medical to get a better picture of the company by looking at: