The stock of Brookfield Asset Management (NYSE:BAM, 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 $45.1515 per share and the market cap of $68.4 billion, Brookfield Asset Management stock is estimated to be significantly overvalued. GF Value for Brookfield Asset Management is shown in the chart below.
Because Brookfield Asset Management is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 14.5% over the past five years.
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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. Brookfield Asset Management has a cash-to-debt ratio of 0.06, which ranks in the bottom 10% of the companies in Asset Management industry. Based on this, GuruFocus ranks Brookfield Asset Management's financial strength as 3 out of 10, suggesting poor balance sheet. This is the debt and cash of Brookfield Asset Management over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Brookfield Asset Management has been profitable 9 years over the past 10 years. During the past 12 months, the company had revenues of $62.8 billion and loss of $0.13 a share. Its operating margin of 15.25% in the middle range of the companies in Asset Management industry. Overall, GuruFocus ranks Brookfield Asset Management's profitability as strong. This is the revenue and net income of Brookfield Asset Management 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. Brookfield Asset Management's 3-year average revenue growth rate is better than 78% of the companies in Asset Management industry. Brookfield Asset Management's 3-year average EBITDA growth rate is 8.5%, which ranks in the middle range of the companies in Asset Management 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, Brookfield Asset Management's ROIC is 1.38 while its WACC came in at 5.02.
Overall, the stock of Brookfield Asset Management (NYSE:BAM, 30-year Financials) shows every sign of being significantly overvalued. The company's financial condition is poor and its profitability is strong. Its growth ranks in the middle range of the companies in Asset Management industry. To learn more about Brookfield Asset Management stock, you can check out its 30-year Financials here.
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