The stock of Lenovo Group (OTCPK:LNVGY, 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 $28.58 per share and the market cap of $17.4 billion, Lenovo Group stock appears to be significantly overvalued. GF Value for Lenovo Group is shown in the chart below.
Because Lenovo Group is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 0.3% over the past three years and is estimated to grow 6.46% annually over the next three to five years.
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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. Lenovo Group has a cash-to-debt ratio of 0.62, which which ranks worse than 69% of the companies in Hardware industry. The overall financial strength of Lenovo Group is 5 out of 10, which indicates that the financial strength of Lenovo Group is fair. This is the debt and cash of Lenovo Group over the past years:
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. Lenovo Group has been profitable 8 over the past 10 years. Over the past twelve months, the company had a revenue of $52.5 billion and earnings of $1.334 a share. Its operating margin is 3.15%, which ranks in the middle range of the companies in Hardware industry. Overall, the profitability of Lenovo Group is ranked 5 out of 10, which indicates fair profitability. This is the revenue and net income of Lenovo 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 Lenovo Group is 0.3%, which ranks in the middle range of the companies in Hardware industry. The 3-year average EBITDA growth is 10.4%, which ranks in the middle range of the companies in Hardware 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, Lenovo Group's return on invested capital is 5.41, and its cost of capital is 7.92. The historical ROIC vs WACC comparison of Lenovo Group is shown below:
Overall, the stock of Lenovo Group (OTCPK:LNVGY, 30-year Financials) is believed to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks in the middle range of the companies in Hardware industry. To learn more about Lenovo Group stock, you can check out its 30-year Financials here.
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