The stock of Grand Canyon Education (NAS:LOPE, 30-year Financials) is believed to be modestly 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 $112.36 per share and the market cap of $5.3 billion, Grand Canyon Education stock appears to be modestly overvalued. GF Value for Grand Canyon Education is shown in the chart below.
Because Grand Canyon Education is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth.
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. Grand Canyon Education has a cash-to-debt ratio of 1.49, which ranks in the middle range of the companies in Education industry. Based on this, GuruFocus ranks Grand Canyon Education's financial strength as 8 out of 10, suggesting strong balance sheet. This is the debt and cash of Grand Canyon Education 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. Grand Canyon Education has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $844.1 million and earnings of $5.46 a share. Its operating margin of 32.87% better than 89% of the companies in Education industry. Overall, GuruFocus ranks Grand Canyon Education's profitability as strong. This is the revenue and net income of Grand Canyon Education 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 Grand Canyon Education is -3.9%, which ranks worse than 75% of the companies in Education industry. The 3-year average EBITDA growth rate is 3.4%, which ranks in the middle range of the companies in Education 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, Grand Canyon Education's return on invested capital is 13.54, and its cost of capital is 5.20. The historical ROIC vs WACC comparison of Grand Canyon Education is shown below:
Overall, The stock of Grand Canyon Education (NAS:LOPE, 30-year Financials) is estimated to be modestly overvalued. The company's financial condition is strong and its profitability is strong. Its growth ranks in the middle range of the companies in Education industry. To learn more about Grand Canyon Education stock, you can check out its 30-year Financials here.
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