The stock of Rada Electronics Industries (NAS:RADA, 30-year Financials) gives every indication 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 $14 per share and the market cap of $686.5 million, Rada Electronics Industries stock is believed to be significantly overvalued. GF Value for Rada Electronics Industries is shown in the chart below.
Because Rada Electronics Industries is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 22.5% over the past 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. Rada Electronics Industries has a cash-to-debt ratio of 3.28, which ranks better than 75% of the companies in Aerospace & Defense industry. Based on this, GuruFocus ranks Rada Electronics Industries's financial strength as 6 out of 10, suggesting fair balance sheet. This is the debt and cash of Rada Electronics Industries over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Rada Electronics Industries has been profitable 4 over the past 10 years. Over the past twelve months, the company had a revenue of $76.2 million and earnings of $0.13 a share. Its operating margin is 7.21%, which ranks in the middle range of the companies in Aerospace & Defense industry. Overall, the profitability of Rada Electronics Industries is ranked 3 out of 10, which indicates poor profitability. This is the revenue and net income of Rada Electronics Industries 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 Rada Electronics Industries is 22.5%, which ranks better than 90% of the companies in Aerospace & Defense industry. The 3-year average EBITDA growth rate is 21.3%, which ranks better than 73% of the companies in Aerospace & Defense industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). 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. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Rada Electronics Industries's ROIC is 11.83 while its WACC came in at 8.43. The historical ROIC vs WACC comparison of Rada Electronics Industries is shown below:
In closing, the stock of Rada Electronics Industries (NAS:RADA, 30-year Financials) is estimated to be significantly overvalued. The company's financial condition is fair and its profitability is poor. Its growth ranks better than 73% of the companies in Aerospace & Defense industry. To learn more about Rada Electronics Industries stock, you can check out its 30-year Financials here.
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