The stock of Trio-Tech International (AMEX:TRT, 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 $4.48 per share and the market cap of $16.6 million, Trio-Tech International stock shows every sign of being significantly overvalued. GF Value for Trio-Tech International is shown in the chart below.
Because Trio-Tech International 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. Trio-Tech International has a cash-to-debt ratio of 2.50, which ranks in the middle range of the companies in Semiconductors industry. Based on this, GuruFocus ranks Trio-Tech International's financial strength as 6 out of 10, suggesting fair balance sheet. This is the debt and cash of Trio-Tech International 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. Trio-Tech International has been profitable 7 years over the past 10 years. During the past 12 months, the company had revenues of $30.7 million and earnings of $0.128 a share. Its operating margin of -0.41% worse than 73% of the companies in Semiconductors industry. Overall, GuruFocus ranks Trio-Tech International's profitability as fair. This is the revenue and net income of Trio-Tech International 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. Trio-Tech International's 3-year average revenue growth rate is worse than 71% of the companies in Semiconductors industry. Trio-Tech International's 3-year average EBITDA growth rate is 4.9%, which ranks in the middle range of the companies in Semiconductors industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Trio-Tech International's return on invested capital is -0.59, and its cost of capital is 8.15. The historical ROIC vs WACC comparison of Trio-Tech International is shown below:
In closing, Trio-Tech International (AMEX:TRT, 30-year Financials) stock 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 Semiconductors industry. To learn more about Trio-Tech International stock, you can check out its 30-year Financials here.
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