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1 Reason for Investors to Worry about OSIM International Ltd

OSIM International Ltd (SGX: O23), best known for its namesake-branded massage chairs, has had a rough year so far.

In the first nine months of 2015, OSIM’s revenue has declined by 11% year-on-year. The lower sales in turn has lead to a big 44% drop in profit over the same period. OSIM’s weak business performance has not gone unnoticed: Shares of the company have tumbled by 46% since the start of the year.

Is there any reversal in sight? Unfortunately, there are some worrying signs amidst the wreckage. Here is one.

Falling free cash flow

OSIM’s free cash flow has been crimped by the downturn in its revenue.

To put some numbers behind the message for context, the massage chair maker generated $21.5 million in free cash flow (FCF) for the first nine months of the year. This is a far cry from the FCF of $53.7 million that was seen in the same period a year ago.

OSIM’s operating cash flow (OCF), capital expenditure, and FCF for the past few quarters are summarised in the graph below:

image (5)

Source: OSIM’s earnings announcements

The lower FCF is a worrying sign.

OSIM paid out $45.4 million in dividends for the full year in 2014. If the firm has the intention to keep its dividends in 2015 at the same level as in 2014, OSIM would likely need to have a strong fourth-quarter in order to avoid having to dip into its cash position to fund its dividends.

To be sure, OSIM has had a strong history of generating FCF, so the company may well recover its cash-generating prowess given time.

Foolish summary

OSIM’s core markets remains soft, so the tough operating environment may continue for a while. In the meantime, we may want to keep a close eye on its ability to generate FCF.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong owns shares in OSIM International Ltd.