The stock of Dollar General (NYSE:DG, 30-year Financials) is believed to be fairly valued, 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 $203.08 per share and the market cap of $48.6 billion, Dollar General stock shows every sign of being fairly valued. GF Value for Dollar General is shown in the chart below.
Because Dollar General is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 16.3% over the past three years and is estimated to grow 3.51% annually over the next three to five years.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Dollar General has a cash-to-debt ratio of 0.10, which is worse than 84% of the companies in the industry of Retail - Defensive. GuruFocus ranks the overall financial strength of Dollar General at 5 out of 10, which indicates that the financial strength of Dollar General is fair. This is the debt and cash of Dollar General 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. Dollar General has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $33.7 billion and earnings of $10.61 a share. Its operating margin is 10.53%, which ranks better than 91% of the companies in the industry of Retail - Defensive. Overall, the profitability of Dollar General is ranked 9 out of 10, which indicates strong profitability. This is the revenue and net income of Dollar General 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 Dollar General is 16.3%, which ranks better than 88% of the companies in the industry of Retail - Defensive. The 3-year average EBITDA growth rate is 23.3%, which ranks better than 75% of the companies in the industry of Retail - Defensive.
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, Dollar General's ROIC is 14.23 while its WACC came in at 3.23. The historical ROIC vs WACC comparison of Dollar General is shown below:
In conclusion, Dollar General (NYSE:DG, 30-year Financials) stock appears to be fairly valued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 75% of the companies in the industry of Retail - Defensive. To learn more about Dollar General stock, you can check out its 30-year Financials here.
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