If you are currently a shareholder in AMN Healthcare Services Inc (NYSE:AMN), 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 AMN’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 free cash flow?
AMN Healthcare Services generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short.
There are two methods I will use to evaluate the quality of AMN Healthcare Services’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
Along with a positive operating cash flow, AMN Healthcare Services also generates a positive free cash flow. However, the yield of 4.53% is not sufficient to compensate for the level of risk investors are taking on. This is because AMN Healthcare Services’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Is AMN Healthcare Services’s yield sustainable?
Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at AMN’s expected operating cash flows. Over the next few years, the company is expected to grow its cash from operations at a double-digit rate of 17.12%, ramping up from its current levels of US$171.16m to US$200.45m in two years’ time. Furthermore, breaking down growth into a year on year basis, AMN is able to increase its growth rate each year, from 4.76% next year, to 11.80% in the following year. The overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto AMN Healthcare Services relative to a well-diversified market index. However, the high growth in operating cash flow may change the tides in the future. Keep in mind that cash is only one aspect of investment analysis and there are other important fundamentals to assess. You should continue to research AMN Healthcare Services to get a more holistic view of the company by looking at:
- Valuation: What is AMN 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 AMN 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 AMN Healthcare Services’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 firstname.lastname@example.org.