The stock of Electromed (AMEX:ELMD, 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 $10.17 per share and the market cap of $87.8 million, Electromed stock shows every sign of being significantly overvalued. GF Value for Electromed is shown in the chart below.
Because Electromed is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 6.4% over the past five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Electromed has a cash-to-debt ratio of 10000.00, which which ranks better than 100% of the companies in the industry of Medical Devices & Instruments. The overall financial strength of Electromed is 10 out of 10, which indicates that the financial strength of Electromed is strong. This is the debt and cash of Electromed 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. Electromed has been profitable 8 years over the past 10 years. During the past 12 months, the company had revenues of $33.1 million and earnings of $0.41 a share. Its operating margin of 13.43% better than 72% of the companies in the industry of Medical Devices & Instruments. Overall, GuruFocus ranks Electromed's profitability as fair. This is the revenue and net income of Electromed 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 Electromed is 6.4%, which ranks in the middle range of the companies in the industry of Medical Devices & Instruments. The 3-year average EBITDA growth rate is 9.1%, which ranks in the middle range of the companies in the industry of Medical Devices & Instruments.
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, Electromed's return on invested capital is 16.50, and its cost of capital is 6.11. The historical ROIC vs WACC comparison of Electromed is shown below:
Overall, The stock of Electromed (AMEX:ELMD, 30-year Financials) shows every sign of being significantly overvalued. The company's financial condition is strong and its profitability is fair. Its growth ranks in the middle range of the companies in the industry of Medical Devices & Instruments. To learn more about Electromed stock, you can check out its 30-year Financials here.
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