Is this small cap healthcare share in the buy zone after today’s update?

The Zenitas Healthcare Ltd (ASX: ZNT) share price will be one to watch on Tuesday after it released its fourth quarter update after the market closed on Monday.

According to the release, the growing home care and health services company saw cash receipts increase to approximately $33 million in the fourth quarter, leading to full-year cash receipts of $106.1 million.

During the final quarter the company generated operating cash flow of $3.65 million, bringing its full year operating cash flow to $10.9 million.

Zenitas Healthcare finished the year with a cash balance of just under $6.7 million, down from $10.9 million at the end of the last quarter. This was largely due to acquisitions made during the period.

As a result of this strong finish to the year, management has advised that Zenitas Healthcare is on course to hit its earnings before interest, tax, depreciation, and amortisation (EBITDA) guidance of between $13 million and $13.5 million prior to acquisition costs.

Should you invest?

If Zenitas Healthcare delivers on its guidance then it will mean that its shares are currently changing hands on an EV/EBITBA multiple of under 7x.

I don’t think this is particularly expensive for a company with such bright long-term growth prospects due to the tailwinds of Australia’s ageing population and a favourable Federal Budget.

As a result, I would class it as a buy along with fellow small cap healthcare shares such as Paragon Care Ltd (ASX: PGC) and Volpara Health Technologies Ltd (ASX: VHT).

However, I do have slight concerns about its cash balance and suspect there is a small possibility that a capital raising could be required in FY 2019. Though hopefully the many earnings accretive acquisitions it has made this year will make it cash flow positive in the near future to avoid this.

As well as Zenitas, I'm tipping these disruptive shares to be market-beaters in FY 2019.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended VOLPARA FPO NZ. The Motley Fool Australia has recommended Paragon Care Limited and Zenitas Healthcare Ltd. 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. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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