The stock of Ocean Power Technologies (AMEX:OPTT, 30-year Financials) is believed 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 $2.31 per share and the market cap of $117.8 million, Ocean Power Technologies stock is estimated to be significantly overvalued. GF Value for Ocean Power Technologies is shown in the chart below.
Because Ocean Power Technologies is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
Link: These companies may deliever higher future returns at reduced risk.
It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Ocean Power Technologies has a cash-to-debt ratio of 36.19, which is better than 84% of the companies in Industrial Products industry. The overall financial strength of Ocean Power Technologies is 6 out of 10, which indicates that the financial strength of Ocean Power Technologies is fair. This is the debt and cash of Ocean Power Technologies 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. Ocean Power Technologies has been profitable 0 years over the past 10 years. During the past 12 months, the company had revenues of $1.2 million and loss of $0.59 a share. Its operating margin of -1012.81% in the bottom 10% of the companies in Industrial Products industry. Overall, GuruFocus ranks Ocean Power Technologies’s profitability as poor. This is the revenue and net income of Ocean Power Technologies over the past years:
Growth is probably the most important factor 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. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Ocean Power Technologies is -61.1%, which ranks in the bottom 10% of the companies in Industrial Products industry. The 3-year average EBITDA growth rate is 69.6%, which ranks better than 97% of the companies in Industrial Products industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted 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. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Ocean Power Technologies’s return on invested capital is -373.55, and its cost of capital is 12.68.
In closing, the stock of Ocean Power Technologies (AMEX:OPTT, 30-year Financials) gives every indication of being significantly overvalued. The company's financial condition is fair and its profitability is poor. Its growth ranks better than 97% of the companies in Industrial Products industry. To learn more about Ocean Power Technologies stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
