The stock of Cirrus Logic (NAS:CRUS, 30-year Financials) is estimated 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 $83.01 per share and the market cap of $4.8 billion, Cirrus Logic stock is estimated to be significantly overvalued. GF Value for Cirrus Logic is shown in the chart below.
Because Cirrus Logic is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which is estimated to grow 2.29% annually over the next three to five years.
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Cirrus Logic has a cash-to-debt ratio of 2.57, which is in the middle range of the companies in Semiconductors industry. The overall financial strength of Cirrus Logic is 8 out of 10, which indicates that the financial strength of Cirrus Logic is strong. This is the debt and cash of Cirrus Logic 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. Cirrus Logic has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $1.4 billion and earnings of $3.37 a share. Its operating margin is 18.06%, which ranks better than 79% of the companies in Semiconductors industry. Overall, GuruFocus ranks the profitability of Cirrus Logic at 8 out of 10, which indicates strong profitability. This is the revenue and net income of Cirrus Logic over the past years:
Growth is probably one of the most important factors 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. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Cirrus Logic's 3-year average revenue growth rate is worse than 67% of the companies in Semiconductors industry. Cirrus Logic's 3-year average EBITDA growth rate is -10.3%, which ranks worse than 78% of the companies in Semiconductors 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, Cirrus Logic's return on invested capital is 17.81, and its cost of capital is 7.64. The historical ROIC vs WACC comparison of Cirrus Logic is shown below:
In short, Cirrus Logic (NAS:CRUS, 30-year Financials) stock shows every sign of being significantly overvalued. The company's financial condition is strong and its profitability is strong. Its growth ranks worse than 78% of the companies in Semiconductors industry. To learn more about Cirrus Logic stock, you can check out its 30-year Financials here.
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