The stock of Fortescue Metals Group (OTCPK:FSUGY, 30-year Financials) shows every sign of being 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 $32.08 per share and the market cap of $49.4 billion, Fortescue Metals Group stock gives every indication of being significantly overvalued. GF Value for Fortescue Metals Group is shown in the chart below.
Because Fortescue Metals Group is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 19.7% over the past five years.
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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. Fortescue Metals Group has a cash-to-debt ratio of 0.97, which ranks worse than 71% of the companies in Metals & Mining industry. Based on this, GuruFocus ranks Fortescue Metals Group's financial strength as 7 out of 10, suggesting fair balance sheet. This is the debt and cash of Fortescue Metals Group over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Fortescue Metals Group has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $15.7 billion and earnings of $4.098 a share. Its operating margin is 60.48%, which ranks better than 98% of the companies in Metals & Mining industry. Overall, GuruFocus ranks the profitability of Fortescue Metals Group at 9 out of 10, which indicates strong profitability. This is the revenue and net income of Fortescue Metals Group 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 Fortescue Metals Group is 19.7%, which ranks better than 83% of the companies in Metals & Mining industry. The 3-year average EBITDA growth is 29.2%, which ranks better than 73% of the companies in Metals & Mining industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Fortescue Metals Group's return on invested capital is 34.65, and its cost of capital is 4.71. The historical ROIC vs WACC comparison of Fortescue Metals Group is shown below:
In conclusion, the stock of Fortescue Metals Group (OTCPK:FSUGY, 30-year Financials) is estimated to be significantly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 73% of the companies in Metals & Mining industry. To learn more about Fortescue Metals Group stock, you can check out its 30-year Financials here.
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