The stock of Linamar (OTCPK:LIMAF, 30-year Financials) appears 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 $60.32 per share and the market cap of $4 billion, Linamar stock gives every indication of being significantly overvalued. GF Value for Linamar is shown in the chart below.
Because Linamar 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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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. Linamar has a cash-to-debt ratio of 0.66, which is in the middle range of the companies in Vehicles & Parts industry. The overall financial strength of Linamar is 6 out of 10, which indicates that the financial strength of Linamar is fair. This is the debt and cash of Linamar 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. Linamar has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $4.4 billion and earnings of $3.233 a share. Its operating margin is 7.50%, which ranks better than 73% of the companies in Vehicles & Parts industry. Overall, the profitability of Linamar is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Linamar 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. Linamar's 3-year average revenue growth rate is worse than 69% of the companies in Vehicles & Parts industry. Linamar's 3-year average EBITDA growth rate is -5.4%, which ranks in the middle range of the companies in Vehicles & Parts 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, Linamar's ROIC is 5.65 while its WACC came in at 8.59. The historical ROIC vs WACC comparison of Linamar is shown below:
In conclusion, the stock of Linamar (OTCPK:LIMAF, 30-year Financials) shows every sign of being 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 Vehicles & Parts industry. To learn more about Linamar stock, you can check out its 30-year Financials here.
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