The stock of Woolworths Group (ASX:WOW, 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 AUD 40.25 per share and the market cap of AUD 50.9 billion, Woolworths Group stock shows every sign of being fairly valued. GF Value for Woolworths Group is shown in the chart below.
Because Woolworths Group is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 5.2% over the past three years and is estimated to grow 3.59% annually over the next three to five years.
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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. Woolworths Group has a cash-to-debt ratio of 0.13, which ranks worse than 76% of the companies in the industry of Retail - Defensive. Based on this, GuruFocus ranks Woolworths Group's financial strength as 5 out of 10, suggesting fair balance sheet. This is the debt and cash of Woolworths Group 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. Woolworths Group has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of AUD 67.1 billion and earnings of AUD 1.121 a share. Its operating margin is 4.18%, which ranks in the middle range of the companies in the industry of Retail - Defensive. Overall, the profitability of Woolworths Group is ranked 6 out of 10, which indicates fair profitability. This is the revenue and net income of Woolworths Group 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 Woolworths Group is 5.2%, which ranks in the middle range of the companies in the industry of Retail - Defensive. The 3-year average EBITDA growth is -5.5%, which ranks worse than 81% of the companies in the industry of Retail - Defensive.
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, Woolworths Group's return on invested capital is 5.33, and its cost of capital is 3.47. The historical ROIC vs WACC comparison of Woolworths Group is shown below:
Overall, the stock of Woolworths Group (ASX:WOW, 30-year Financials) gives every indication of being fairly valued. The company's financial condition is fair and its profitability is fair. Its growth ranks worse than 81% of the companies in the industry of Retail - Defensive. To learn more about Woolworths Group stock, you can check out its 30-year Financials here.
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