The stock of ARC Document Solutions (NYSE:ARC, 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 $2.3 per share and the market cap of $98.4 million, ARC Document Solutions stock shows every sign of being significantly overvalued. GF Value for ARC Document Solutions is shown in the chart below.
Because ARC Document Solutions 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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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. ARC Document Solutions has a cash-to-debt ratio of 0.38, which ranks worse than 66% of the companies in Business Services industry. Based on this, GuruFocus ranks ARC Document Solutions's financial strength as 5 out of 10, suggesting fair balance sheet. This is the debt and cash of ARC Document Solutions 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. ARC Document Solutions has been profitable 5 over the past 10 years. Over the past twelve months, the company had a revenue of $289.5 million and earnings of $0.15 a share. Its operating margin is 4.28%, which ranks in the middle range of the companies in Business Services industry. Overall, GuruFocus ranks the profitability of ARC Document Solutions at 5 out of 10, which indicates fair profitability. This is the revenue and net income of ARC Document Solutions 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. ARC Document Solutions's 3-year average revenue growth rate is worse than 79% of the companies in Business Services industry. ARC Document Solutions's 3-year average EBITDA growth rate is 10.8%, which ranks in the middle range of the companies in Business Services 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, ARC Document Solutions's ROIC is 3.04 while its WACC came in at 4.98. The historical ROIC vs WACC comparison of ARC Document Solutions is shown below:
In closing, the stock of ARC Document Solutions (NYSE:ARC, 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 Business Services industry. To learn more about ARC Document Solutions stock, you can check out its 30-year Financials here.
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