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Is CR Bard a Cash King?

As an investor, it pays to follow the cash. If you figure out how a company moves its money, you might eventually find some of that cash flowing into your pockets.

In this series, we'll highlight four big dogs in an industry, and compare their "cash king margins" over time, trying to determine which has the greatest likelihood of putting cash back in your pocket. After all, a company can pay dividends and buy back stock only after it's actually received cash -- not just when it books those accounting figments known as "profits."

The cash king margin
Looking at a company's cash flow statement can help you determine whether its free cash flow actually backs up its reported profit. Companies that can create 10% or more free cash flow from their revenue can be powerful compounding machines for your portfolio.

To find the cash king margin, divide the free cash flow from the cash flow statement by sales:

Cash king margin = Free cash flow / sales

Let's take McDonald's as an example. Over the last four quarters, the restaurateur generated $6.5 billion in operating cash flow. It invested about $2.2 billion in property, plant, and equipment. To calculate free cash flow, subtract McDonald's investment ($2.2 billion) from its operating cash flow ($6.5 billion). That leaves us with $4.3 billion in free cash flow, which the company can save for future expenditures or distribute to shareholders.

Taking McDonald's sales of $24.6 billion over the same period, we can figure that the company has a cash king margin of about 17% -- a nice high number. In other words, for every dollar of sales, McDonald's produces $0.17 in free cash.

Ideally, we'd like to see the cash king margin top 10%. The best blue chips can notch numbers greater than 20%, making them true cash dynamos. But some businesses, including many types of retailing, just can't sustain such margins.

We're also looking for companies that can consistently increase their margins over time, which indicates that their competitive position is improving. Erratic swings in margins could signal a deteriorating business, or perhaps some financial skullduggery; you'll have to dig deeper to discover the reason.

Three companies
Today, let's look at CR Bard (NYSE: BCR  ) and three of its industry peers:

Company

Cash King Margin (TTM)

1 Year Ago

3 Years Ago

5 Years Ago

CR Bard

20.8%

22.5%

20.7%

15.4%

Boston Scientific (NYSE: BSX  )

3.1%

(0.4%)

11.2%

11.8%

AngioDynamics (Nasdaq: ANGO  )

15.7%

12.7%

11.1%

4.4%

Hologic (Nasdaq: HOLX  ) 23.3% 29.1% 14.1% 5.1%

CR Bard, AngioDynamics, and Hologic far exceed our 10% threshold for attractiveness, and they have shown nice growth in their cash king margins from five years ago. Boston Scientific has much lower margins, which have declined drastically from five years ago. Compare these returns to the blue chips of software and biotech, to get some context.

The cash king margin can help you find highly profitable businesses, but it should only be the start of your search. The ratio does have its limits, especially for fast-growing small businesses. Many such companies reinvest all of their cash flow into growing the business, leaving them little or no free cash -- but that doesn't necessarily make them poor investments. You'll need to look closer to determine exactly how a company is using its cash.

Still, if you can cut through the earnings headlines to follow the cash instead, you might be on the path toward seriously great investments.

Want to read more about CR Bard? Add it to My Watchlist, which will find all of our Foolish analysis on this stock. You can also add Boston Scientific, AngioDynamics, Hologic, or any other stock you like.

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Jim Royal owns shares of McDonald's. Motley Fool newsletter services have recommended buying shares of McDonald's. 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.


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  • Report this Comment On July 03, 2011, at 10:26 AM, TimMasterson1 wrote:

    Of course CR Bard is going to have a high % of " Free " cash . Why ??? Because they are not paying or wanting to settle on the 4000+ cases pending in Federal Court due to their Hernia mesh products that killed several people and destroyed the lives and family's of thousands , and they refuse to settle cases , stalling the courts by changing attorneys .

    This is not CR Bard / Davol INC's first malicious doing . They have had several products recalled by the FDA . Hernia mesh , Surgical Graft that was contaminated with bacteria ,

    According to the CR Bard website ( direct quote )

    Clinical Support

    HERNIA REPAIR

    IMPORTANT PATIENT MANAGEMENT INFORMATION:

    Bard® Composix® Kugel®

    Large Sized Patch Class I Recall and Market Withdrawal

    Product Code: 0010202, Bard® Composix® Kugel® Large Oval, 5.4”x7.0”

    Product Code: 0010204, Bard® Composix® Kugel® Large Circle, 4.5”

    January 10, 2007

    This letter is intended to inform you of actions being undertaken by Davol, a subsidiary of C. R. Bard, Inc., with the Large Sized Composix ® Kugel ® patches referenced in the header box at the top of this letter. First, we are expanding the recall action to certain manufacturing lots of the referenced product based on having received additional complaint reports of PET recoil ring breakage. Specific information about this recall action is discussed below. Second, Davol has decided to withdraw from the market all remaining 0010202 and 0010204 product which has the same component design as the manufacturing lots being recalled. An upgraded product design for both product codes is available for replacement.

    EXPANDED RECALL ACTION:

    Davol is expanding the voluntary recall of specific lots of Bard ® Composix ® Kugel ® Large Oval and Large Circle Patches. Immediately discontinue use of the specific product codes and lot numbers listed in the attachment. Additionally, please immediately distribute copies of the Important Patient Management Information to clinicians who may have implanted, or who may be managing, patients already implanted with one of these products under voluntary recall. This information supplements information contained in the recall letters issued by Davol in December 2005 and January 2006 for the Extra Large Patches and March 2006 for the Large Patches.

    Product codes and lot numbers that contain the re-designed product and are not subject to this recall action can easily be identified on the case or unit package with the label stating “Redesigned for improved ring integrity”. If this label is affixed to your case stock and/or individual packages, this product is not affected by this recall and need not be returned to Davol.

    Additionally, current product Instructions For Use (“IFU”) are included with this letter as a reminder of the appropriate folding technique to be used for both Open Placement and Laparoscopic Placement for the Large Composix ® Kugel ® Patches. Additional copies of these IFUs are available from Davol Customer Service by calling 1-800-531-4124.

    SUMMARY OF THE PRODUCT RECALL COMMUNICATIONS:

    Extension of the previous recall to specific lots of Bard ® Composix ® Kugel ® Patches is being conducted because we have received additional complaint reports for PET recoil ring breakage on lots of product codes 0010202 manufactured from January 1, 2004 through September 30, 2005. That rate of occurrence is defined below. There is a risk that the ring welds could break under stress placed on these products during placement, which could potentially lead to patient complications such as abdominal pain, bowel perforation or chronic enteric fistulas. The products and lot numbers being recalled are listed on the attached Acknowledgement/Stock Status Form, which has been sent to all hospital administrators, risk managers, materials managers, OR managers, and distributors.

    Observed Rate of Occurrence and Clinical Implications:

    Product Code 0010202, Bard ® Composix ® Kugel ® Large Oval Patch: A total of 6 ring breaks have been reported, and four of these complaints have been confirmed, from the approximately 25,835 units manufactured between January 1, 2004 and September 30, 2005, for a reported occurrence rate of 0.023%.

    Incidents:

    One (1) Incident occurred during the mesh placement surgery and the product was not implanted.

    One (1) incident of a broken ring was noted at the time of surgery and the ring was removed but the mesh was left implanted. No patient symptoms have been reported following this procedure.

    One (1) incident was reported where a broken ring had migrated into the abdominal wall and was removed, leaving the mesh implanted.

    One (1) incident was reported where the mesh was explanted as a response to reported abdominal pain and a broken ring was noted.

    Two (2) inconclusive incidents were reported where bowel perforation and broken rings were noted at the time of explant.

    Notice it say nothing about the deaths they have caused .

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Related Tickers

5/25/2012 4:00 PM
BCR $99.90 Down -0.09 -0.09%
C.R. Bard, Inc. CAPS Rating: ****
HOLX $16.92 Down -0.05 -0.29%
Hologic, Inc. CAPS Rating: ****
BSX $5.87 Down -0.04 -0.68%
Boston Scientific… CAPS Rating: ***
ANGO $12.20 Down -0.13 -1.05%
AngioDynamics, Inc… CAPS Rating: ****

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