The stock of Sonoma Pharmaceuticals (NAS:SNOA, 30-year Financials) appears to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $8.8 per share and the market cap of $18.3 million, Sonoma Pharmaceuticals stock gives every indication of being significantly overvalued. GF Value for Sonoma Pharmaceuticals is shown in the chart below.
Because Sonoma Pharmaceuticals is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Sonoma Pharmaceuticals has a cash-to-debt ratio of 2.80, which ranks better than 66% of the companies in Drug Manufacturers industry. Based on this, GuruFocus ranks Sonoma Pharmaceuticals's financial strength as 4 out of 10, suggesting poor balance sheet. This is the debt and cash of Sonoma Pharmaceuticals over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Sonoma Pharmaceuticals has been profitable 2 over the past 10 years. Over the past twelve months, the company had a revenue of $21.8 million and loss of $0.98 a share. Its operating margin is -14.40%, which ranks worse than 70% of the companies in Drug Manufacturers industry. Overall, the profitability of Sonoma Pharmaceuticals is ranked 2 out of 10, which indicates poor profitability. This is the revenue and net income of Sonoma Pharmaceuticals over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Sonoma Pharmaceuticals is -22.3%, which ranks in the bottom 10% of the companies in Drug Manufacturers industry. The 3-year average EBITDA growth is 60.3%, which ranks better than 94% of the companies in Drug Manufacturers industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Sonoma Pharmaceuticals's return on invested capital is -35.41, and its cost of capital is 5.01. The historical ROIC vs WACC comparison of Sonoma Pharmaceuticals is shown below:
To conclude, Sonoma Pharmaceuticals (NAS:SNOA, 30-year Financials) stock appears to be significantly overvalued. The company's financial condition is poor and its profitability is poor. Its growth ranks better than 94% of the companies in Drug Manufacturers industry. To learn more about Sonoma Pharmaceuticals stock, you can check out its 30-year Financials here.
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