Norsk Hydro ASA Stock Shows Every Sign Of Being Significantly Overvalued

Author's Avatar
Mar 31, 2021
Article's Main Image

The stock of Norsk Hydro ASA (OTCPK:NHYDY, 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 $6.2901 per share and the market cap of $12.9 billion, Norsk Hydro ASA stock gives every indication of being significantly overvalued. GF Value for Norsk Hydro ASA is shown in the chart below.

US0M01.png?1617174763

Because Norsk Hydro ASA is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 8.1% over the past five years.

Link: These companies may deliever higher future returns at reduced risk.

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. Norsk Hydro ASA has a cash-to-debt ratio of 0.72, which which ranks worse than 74% of the companies in Metals & Mining industry. The overall financial strength of Norsk Hydro ASA is 5 out of 10, which indicates that the financial strength of Norsk Hydro ASA is fair. This is the debt and cash of Norsk Hydro ASA over the past years:

1617174763175.png

Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Norsk Hydro ASA has been profitable 7 over the past 10 years. Over the past twelve months, the company had a revenue of $14.7 billion and earnings of $0.125 a share. Its operating margin is 15.97%, which ranks better than 74% of the companies in Metals & Mining industry. Overall, the profitability of Norsk Hydro ASA is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Norsk Hydro ASA over the past years:

1617174763576.png

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. Norsk Hydro ASA's 3-year average revenue growth rate is better than 67% of the companies in Metals & Mining industry. Norsk Hydro ASA's 3-year average EBITDA growth rate is -3.6%, which ranks worse than 67% of the companies in Metals & Mining industry.

One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average 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 return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Norsk Hydro ASA's ROIC is 10.66 while its WACC came in at 10.00. The historical ROIC vs WACC comparison of Norsk Hydro ASA is shown below:

1617174763939.png

Overall, Norsk Hydro ASA (OTCPK:NHYDY, 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 67% of the companies in Metals & Mining industry. To learn more about Norsk Hydro ASA stock, you can check out its 30-year Financials here.

To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.