What You Need To Know About Nuance Communications Inc’s (NASDAQ:NUAN) Cash Situation
Nuance Communications Inc (NASDAQ:NUAN) 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. What is left after investment, determines the value of the stock since this cash flow technically belongs to investors of the company. I will take you through NUAN’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.
See our latest analysis for Nuance Communications
Is Nuance Communications generating enough cash?
Nuance Communications’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 Nuance Communications to continue to grow, or at least, maintain its current operations.
The two ways to assess whether Nuance Communications’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
Along with a positive operating cash flow, Nuance Communications also generates a positive free cash flow. However, the yield of 4.76% is not sufficient to compensate for the level of risk investors are taking on. This is because Nuance Communications’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Is Nuance Communications’s yield sustainable?
Can NUAN 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, expected growth for NUAN’s operating cash is negative, with operating cash flows expected to decline from its current level of US$444m. This is unfavourable to its future outlook, especially if capital expenditure heads the opposite direction. However, breaking down growth into a year on year basis, NUAN ‘s negative growth rate improves each year, from -4.2% next year, to -3.1% in the following year.
Next Steps:
Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto Nuance Communications relative to a well-diversified market index. Moreover, the stock’s negative growth prospects in terms of cash flow, seems worrisome. Now you know to keep cash flows in mind, I recommend you continue to research Nuance Communications to get a more holistic view of the company by looking at:
Valuation: What is NUAN 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 NUAN 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 Nuance Communications’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 editorial-team@simplywallst.com.
