The stock of Vedanta (NYSE:VEDL, 30-year Financials) is believed 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 $12.84 per share and the market cap of $11.9 billion, Vedanta stock gives every indication of being significantly overvalued. GF Value for Vedanta is shown in the chart below.
Because Vedanta 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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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Vedanta has a cash-to-debt ratio of 0.57, which which ranks worse than 77% of the companies in Metals & Mining industry. The overall financial strength of Vedanta is 5 out of 10, which indicates that the financial strength of Vedanta is fair. This is the debt and cash of Vedanta 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. Vedanta has been profitable 7 over the past 10 years. Over the past twelve months, the company had a revenue of $10.6 billion and loss of $1.095 a share. Its operating margin is 32.74%, which ranks better than 88% of the companies in Metals & Mining industry. Overall, the profitability of Vedanta is ranked 6 out of 10, which indicates fair profitability. This is the revenue and net income of Vedanta over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Vedanta is -2.2%, which ranks in the middle range of the companies in Metals & Mining industry. The 3-year average EBITDA growth rate is -39.7%, which ranks worse than 88% of the companies in Metals & Mining industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). 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. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Vedanta's ROIC was 20.21, while its WACC came in at 11.77. The historical ROIC vs WACC comparison of Vedanta is shown below:
In short, Vedanta (NYSE:VEDL, 30-year Financials) stock appears to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks worse than 88% of the companies in Metals & Mining industry. To learn more about Vedanta stock, you can check out its 30-year Financials here.
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