The stock of DRDGold (NYSE:DRD, 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 $10.04 per share and the market cap of $858.5 million, DRDGold stock is estimated to be significantly overvalued. GF Value for DRDGold is shown in the chart below.
Because DRDGold is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which is estimated to grow 23.00% 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. DRDGold has a cash-to-debt ratio of 36.41, which which ranks in the middle range of the companies in Metals & Mining industry. The overall financial strength of DRDGold is 8 out of 10, which indicates that the financial strength of DRDGold is strong. This is the debt and cash of DRDGold 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. DRDGold has been profitable 8 over the past 10 years. Over the past twelve months, the company had a revenue of $267.6 million and earnings of $0.526 a share. Its operating margin is 23.19%, which ranks better than 80% of the companies in Metals & Mining industry. Overall, GuruFocus ranks the profitability of DRDGold at 5 out of 10, which indicates fair profitability. This is the revenue and net income of DRDGold 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. DRDGold's 3-year average revenue growth rate is in the middle range of the companies in Metals & Mining industry. DRDGold's 3-year average EBITDA growth rate is 54.9%, which ranks better than 93% of the companies in Metals & Mining industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted 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 ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, DRDGold's ROIC was 17.65, while its WACC came in at 17.30. The historical ROIC vs WACC comparison of DRDGold is shown below:
In summary, DRDGold (NYSE:DRD, 30-year Financials) stock is estimated to be significantly overvalued. The company's financial condition is strong and its profitability is fair. Its growth ranks better than 93% of the companies in Metals & Mining industry. To learn more about DRDGold stock, you can check out its 30-year Financials here.
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