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Why Sonic Healthcare Limited’s (ASX:SHL) Cash Is A Factor You Need To Consider

Two important questions to ask before you buy Sonic Healthcare Limited (ASX:SHL) is, how it makes money and how it spends its cash. After investment, what’s left over is what belongs to you, the investor. This also determines how much the stock is worth. I’ve analysed below, the health and outlook of SHL’s cash flow, which will help you understand the stock from a cash standpoint. Cash is an important concept to grasp as an investor, as it directly impacts the value of your shares and the future growth potential of your portfolio.

See our latest analysis for Sonic Healthcare

What is Sonic Healthcare’s cash yield?

Sonic Healthcare’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 Sonic Healthcare to continue to grow, or at least, maintain its current operations.

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The two ways to assess whether Sonic Healthcare’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

Sonic Healthcare’s yield of 2.47% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on Sonic Healthcare but are not being adequately rewarded for doing so.

ASX:SHL Net Worth September 2nd 18
ASX:SHL Net Worth September 2nd 18

What’s the cash flow outlook for Sonic Healthcare?

Does SHL’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 couple of years, the company is expected to grow its cash from operations at a double-digit rate of 13.0%, ramping up from its current levels of AU$767.9m to AU$867.5m in three years’ time. Furthermore, breaking down growth into a year on year basis, SHL is able to increase its growth rate each year, from -3.5% in the upcoming year, to 5.3% by the end of the third year. The overall future outlook seems buoyant if SHL can maintain its levels of capital expenditure as well.

Next Steps:

Although its positive operating cash flow, and high future growth, is appealing, the low free cash flow yield is unattractive. This is because you would be better compensated in terms of cash yield, by investing in the market index, as well as take on lower diversification risk. Now you know to keep cash flows in mind, I recommend you continue to research Sonic Healthcare to get a better picture of the company by looking at:

  1. Valuation: What is SHL 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 SHL is currently mispriced by the market.

  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Sonic Healthcare’s board and the CEO’s back ground.

  3. 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.