MKS Instruments Inc (NASDAQ:MKSI) 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 MKSI’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.
Is MKS Instruments generating enough cash?
MKS Instruments’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 MKS Instruments to continue to grow, or at least, maintain its current operations.
I will be analysing MKS Instruments’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
MKS Instruments’s yield of 5.92% 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 MKS Instruments is higher, this may mean inadequate compensation above and beyond merely investing in the whole market.
Is MKS Instruments’s yield sustainable?
Does MKSI’s future look brighter in terms of its ability to generate higher operating cash flows? This can be estimated by examining the trend of the company’s operating cash flow moving forward. In the next few years, the company is expected to grow its cash from operations at a double-digit rate of 89%, ramping up from its current levels of US$359m to US$678m in two years’ time. Furthermore, breaking down growth into a year on year basis, MKSI is able to increase its growth rate each year, from 33% next year, to 42% in the following year. The overall future outlook seems buoyant if MKSI can maintain its levels of capital expenditure as well.
MKS Instruments is compensating investors at a cash yield similar to the wider market portfolio. However, if you factor in the higher risk of holding just MKS Instruments compared to the well-diversified market index, the stock doesn’t seem as appealing. Now you know to keep cash flows in mind, I recommend you continue to research MKS Instruments to get a better picture of the company by looking at:
- Valuation: What is MKSI 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 MKSI 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 MKS Instruments’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.