FPH. How does that work?

I’ve been looking a bit at Fisher and Paykal Healthcare recently, an innovative company from NZ specialising in breathing related medical products. Ive always been interested in this company, and it has been a darling of the NZ sharemarket.

Its recently dropped in price, so I thought I would have a quick glance at its financials. When I look at a company, I quickly work out whether its making cash. Not net profit, but free cash flow. So, at the end of the year, does its bank account have more money than at the start, which can then be used for paying off debt, lavish parties etc. The theory is, so long as the company is spinning off cash, things arent going to go too far wrong.

Now, I was a bit surprised to find the FPH results. FPH makes a ‘reasonable’ amount of money from operations, 44 million in 2008 (2009 results not out yet). But they spent a chunk of that on capital expenditure, ie, expenditure that the company needs to make to continue operations, plant and equipment upgrades etc. So, you take that out of the money they make from operations. And then… they paid out 60+million in dividends. Now, if you only make 40 something million, and then spend 10-20 million on capital expenditure, and then spend another 60+ million on dividends, um, you’re left with a kinda sizable deficit.

So, where does that money come from? From borrowings. FPH does not appear to be able to afford their dividend payout, and this can be seen in the increasing size of their debt. Its not clear why their dividend policy is the way it is, but it doesnt seem sustainable, particularly if banks start being a bit more conservative in their lending policy.

Thoughts? Are FPH on the verge of profitting massively from their patents and innovative technology? Am I being way too bearish on a cool kiwi company?

2009 update: The 2008-09 FPH annual report shows the same trend. 62million cash from operating, minus 22 million of property/plant/intangible spending and 66million of dividends, leaves -26million in free cash flow, funded by… 37 million of new borrowings.

FPH. How does that work?

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