If you are currently a shareholder in Chembio Diagnostics Inc (NASDAQ:CEMI), 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 CEMI’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.
What is free cash flow?
Chembio Diagnostics’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 Chembio Diagnostics to continue to grow, or at least, maintain its current operations.
The two ways to assess whether Chembio Diagnostics’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
The business reinvests all its cash profits as well as borrows more money, to maintain and grow the company. This leads to a negative FCF, as well as negative FCF yield, in which case is not a very useful measure.
What’s the cash flow outlook for Chembio Diagnostics?
Can Chembio Diagnostics improve its operating cash production in the future? Let’s take a quick look at the cash flow trend Chembio Diagnostics is expected to deliver over time. Over the next few years, expected growth for CEMI’s operating cash is negative, with operating cash flows expected to decline from its current level of -US$4.7m. This is unfavourable to its future outlook, especially if capital expenditure heads the opposite direction. Breaking down operating cash growth into a year-on-year basis, it seems like CEMI will face a continued decline in growth rates, from 7.8% next year, to -83.6% in the following year.
Now you know to keep cash flows in mind, I recommend you continue to research Chembio Diagnostics to get a more holistic view of the company by looking at:
- Historical Performance: What has CEMI’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Chembio Diagnostics’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.