Ansell Limited (ASX:ANN) 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. This difference directly flows down to how much the stock is worth. Operating in the healthcare supplies industry, ANN is currently valued at AU$3.55b. Today we will examine ANN’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.
What is Ansell’s cash yield?
Ansell’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 Ansell to continue to grow, or at least, maintain its current operations.
I will be analysing Ansell’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
Ansell’s yield of 6.43% 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 Ansell is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
Does Ansell have a favourable cash flow trend?
Can ANN 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 few years, the company is expected to grow its cash from operations at a double-digit rate of 33.0%, ramping up from its current levels of US$153.6m to US$204.3m in three years’ time. Although this seems impressive, breaking down into year-on-year growth rates, ANN’s operating cash flow growth is expected to decline from a rate of 22.8% in the upcoming year, to 4.7% by the end of the third year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
The yield you receive on Ansell 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! Now you know to keep cash flows in mind, I suggest you continue to research Ansell to get a more holistic view of the company by looking at:
- Valuation: What is ANN 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 ANN 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 Ansell’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 email@example.com.