The stock of Bausch Health (NYSE:BHC, 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 $31.71 per share and the market cap of $11.3 billion, Bausch Health stock is believed to be significantly overvalued. GF Value for Bausch Health is shown in the chart below.
Because Bausch Health is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which is estimated to grow 1.09% 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. Bausch Health has a cash-to-debt ratio of 0.03, which ranks in the bottom 10% of the companies in Drug Manufacturers industry. Based on this, GuruFocus ranks Bausch Health's financial strength as 2 out of 10, suggesting poor balance sheet. This is the debt and cash of Bausch Health 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. Bausch Health has been profitable 3 years over the past 10 years. During the past 12 months, the company had revenues of $8 billion and loss of $1.58 a share. Its operating margin of 16.27% better than 76% of the companies in Drug Manufacturers industry. Overall, GuruFocus ranks Bausch Health's profitability as poor. This is the revenue and net income of Bausch Health 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 Bausch Health is -2.9%, which ranks worse than 76% of the companies in Drug Manufacturers industry. The 3-year average EBITDA growth is -6.6%, which ranks worse than 68% of the companies in Drug Manufacturers 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, Bausch Health's return on invested capital is 2.74, and its cost of capital is 6.73. The historical ROIC vs WACC comparison of Bausch Health is shown below:
In conclusion, the stock of Bausch Health (NYSE:BHC, 30-year Financials) appears to be significantly overvalued. The company's financial condition is poor and its profitability is poor. Its growth ranks worse than 68% of the companies in Drug Manufacturers industry. To learn more about Bausch Health stock, you can check out its 30-year Financials here.
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