The stock of Cognizant Technology Solutions (NAS:CTSH, 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 $78.88 per share and the market cap of $41.9 billion, Cognizant Technology Solutions stock appears to be fairly valued. GF Value for Cognizant Technology Solutions is shown in the chart below.
Because Cognizant Technology Solutions is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 7.3% over the past three years and is estimated to grow 4.04% annually over the next three to five years.
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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. Cognizant Technology Solutions has a cash-to-debt ratio of 1.55, which is in the middle range of the companies in Software industry. The overall financial strength of Cognizant Technology Solutions is 7 out of 10, which indicates that the financial strength of Cognizant Technology Solutions is fair. This is the debt and cash of Cognizant Technology Solutions 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. Cognizant Technology Solutions has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $16.7 billion and earnings of $2.57 a share. Its operating margin of 13.99% better than 79% of the companies in Software industry. Overall, GuruFocus ranks Cognizant Technology Solutions's profitability as strong. This is the revenue and net income of Cognizant Technology Solutions 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 Cognizant Technology Solutions is 7.3%, which ranks in the middle range of the companies in Software industry. The 3-year average EBITDA growth is -1.9%, which ranks worse than 72% 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, Cognizant Technology Solutions's return on invested capital is 12.61, and its cost of capital is 8.51. The historical ROIC vs WACC comparison of Cognizant Technology Solutions is shown below:
To conclude, the stock of Cognizant Technology Solutions (NAS:CTSH, 30-year Financials) is estimated to be fairly valued. The company's financial condition is fair and its profitability is strong. Its growth ranks worse than 72% of the companies in Software industry. To learn more about Cognizant Technology Solutions stock, you can check out its 30-year Financials here.
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