Calling all cash flows
When you are trying to buy the market's best stocks, it's worth checking up on your companies' free cash flow once a quarter or so, to see whether it bears any relationship to the net income in the headlines. That's what we do with this series. Today, we're checking in on Cantel Medical (NYS: CMN) , whose recent revenue and earnings are plotted below.
Over the past 12 months, Cantel Medical generated $44.3 million cash while it booked net income of $37.9 million. That means it turned 11.0% of its revenue into FCF. That sounds pretty impressive.
Unfortunately, the cash flow statement isn't immune from nonsense, either. That's why it pays to take a close look at the components of cash flow from operations, to make sure that the cash flows are of high quality. What does that mean? To me, it means they need to be real and replicable in the upcoming quarters, rather than being offset by continual cash outflows that don't appear on the income statement (such as major capital expenditures).
So how does the cash flow at Cantel Medical look? Take a peek at the chart below, which flags questionable cash flow sources with a red bar.
With questionable cash flows amounting to only 2.1% of operating cash flow, Cantel Medical's cash flows look clean. Within the questionable cash flow figure plotted in the TTM period above, changes in taxes payable provided the biggest boost, at 7.2% of cash flow from operations. Overall, the biggest drag on FCF came from capital expenditures, which consumed 11.0% of cash from operations.
Most investors don't keep tabs on their companies' cash flow. I think that's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. Better yet, you'll improve your odds of finding the underappreciated home-run stocks that provide the market's best returns.
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The article Here's How Cantel Medical Is Making You So Much Cash originally appeared on Fool.com.
Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor ofMotley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.