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MedicX Fund Limited is a UK£354m small-cap, real estate investment trust (REIT) based in London, United Kingdom. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how MXF’s business operates and also how we should analyse its stock. Below, I’ll look at a few important metrics to keep in mind as part of your research on MXF.
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Funds from Operations (FFO) is a higher quality measure of MXF’s earnings compared to net income. This term is very common in the REIT investing world as it provides a cleaner look at its cash flow from daily operations by excluding impact of one-off activities or non-cash items such as depreciation. For MXF, its FFO of UK£15m makes up 43% of its gross profit, which means over a third of its earnings are high-quality and recurring.
MXF’s financial stability can be gauged by seeing how much its FFO generated each year can cover its total amount of debt. The higher the coverage, the less risky MXF is, broadly speaking, to have debt on its books. The metric I’ll be using, FFO-to-debt, also estimates the time it will take for the company to repay its debt with its FFO. With a ratio of 4.0%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take MXF 24.78 years to pay off using just operating income, which is a long time, and risk increases with time. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.
I also look at MXF’s interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it’s better to use FFO divided by net interest. With an interest coverage ratio of 0.97x, MXF is not generating an appropriate amount of cash from its borrowings. Typically, a ratio of greater than 3x is seen as safe.
In terms of valuing MXF, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. In MXF’s case its P/FFO is 23.76x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.
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In this article, I’ve taken a look at Funds from Operations using various metrics, but it is certainly not sufficient to derive an investment decision based on this value alone. MedicX Fund can bring about diversification for your portfolio, but before you decide to invest, take a look at the other aspects you must consider before investing: