Should Investors Be Happy About Balchem Corporation’s (NASDAQ:BCPC) Cash Levels?

Simply Wall St

Balchem Corporation (NASDAQ:BCPC) 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. This difference directly flows down to how much the stock is worth. Operating in the industry, BCPC is currently valued at US$2.9b. Today we will examine BCPC’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.

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What is Balchem’s cash yield?

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

There are two methods I will use to evaluate the quality of Balchem’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

Balchem’s yield of 3.06% 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 Balchem but are not being adequately rewarded for doing so.

NasdaqGS:BCPC Balance Sheet Net Worth, March 24th 2019

Is Balchem’s yield sustainable?

Does BCPC’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 15%, ramping up from its current levels of US$119m to US$137m in two years’ time. Furthermore, breaking down growth into a year on year basis, BCPC is able to increase its growth rate each year, from 2.5% next year, to 13% in the following year. The overall future outlook seems buoyant if BCPC can maintain its levels of capital expenditure as well.

Next Steps:

Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto Balchem relative to a well-diversified market index. However, the high growth in operating cash flow may change the tides in the future. Now you know to keep cash flows in mind, You should continue to research Balchem to get a more holistic view of the company by looking at:

  1. Valuation: What is BCPC 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 BCPC 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 Balchem’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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.