The stock of Sony Group (NYSE:SONY, 30-year Financials) shows every sign of being 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 $110.15 per share and the market cap of $136.4 billion, Sony Group stock is estimated to be significantly overvalued. GF Value for Sony Group is shown in the chart below.
Because Sony Group is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 3.5% over the past three years and is estimated to grow 1.86% annually over the next three to five years.
Link: These companies may deliever higher future returns at reduced risk.
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. Sony Group has a cash-to-debt ratio of 1.83, which is in the middle range of the companies in Hardware industry. GuruFocus ranks the overall financial strength of Sony Group at 5 out of 10, which indicates that the financial strength of Sony Group is fair. This is the debt and cash of Sony Group 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. Sony Group has been profitable 6 years over the past 10 years. During the past 12 months, the company had revenues of $80.5 billion and earnings of $8.18 a share. Its operating margin of 10.74% better than 77% of the companies in Hardware industry. Overall, GuruFocus ranks Sony Group's profitability as fair. This is the revenue and net income of Sony Group 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 stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Sony Group is 3.5%, which ranks in the middle range of the companies in Hardware industry. The 3-year average EBITDA growth rate is 21.3%, which ranks better than 74% of the companies in Hardware 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, Sony Group's return on invested capital is 4.14, and its cost of capital is 4.64. The historical ROIC vs WACC comparison of Sony Group is shown below:
In summary, the stock of Sony Group (NYSE:SONY, 30-year Financials) is believed to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks better than 74% of the companies in Hardware industry. To learn more about Sony Group 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.
