The stock of FalconStor Software (OTCPK:FALC, 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 $4.5 per share and the market cap of $26.8 million, FalconStor Software stock is estimated to be significantly overvalued. GF Value for FalconStor Software is shown in the chart below.
Because FalconStor Software 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. FalconStor Software has a cash-to-debt ratio of 0.56, which ranks worse than 80% of the companies in Software industry. Based on this, GuruFocus ranks FalconStor Software’s financial strength as 3 out of 10, suggesting poor balance sheet. This is the debt and cash of FalconStor Software over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. FalconStor Software has been profitable 2 over the past 10 years. Over the past twelve months, the company had a revenue of $15.4 million and earnings of $0.047 a share. Its operating margin is 21.09%, which ranks better than 88% of the companies in Software industry. Overall, the profitability of FalconStor Software is ranked 2 out of 10, which indicates poor profitability. This is the revenue and net income of FalconStor Software over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of FalconStor Software is -64%, which ranks in the bottom 10% of the companies in Software industry. The 3-year average EBITDA growth is -48%, which ranks in the bottom 10% of the companies in Software 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, FalconStor Software’s return on invested capital is 23.03, and its cost of capital is 19.60. The historical ROIC vs WACC comparison of FalconStor Software is shown below:
In summary, The stock of FalconStor Software (OTCPK:FALC, 30-year Financials) is believed to be significantly overvalued. The company's financial condition is poor and its profitability is poor. Its growth ranks in the bottom 10% of the companies in Software industry. To learn more about FalconStor Software stock, you can check out its 30-year Financials here.
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