The stock of Aramark (NYSE:ARMK, 30-year Financials) appears 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 $39.46 per share and the market cap of $10 billion, Aramark stock gives every indication of being significantly overvalued. GF Value for Aramark is shown in the chart below.
Because Aramark is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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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. Aramark has a cash-to-debt ratio of 0.14, which is worse than 73% of the companies in Restaurants industry. GuruFocus ranks the overall financial strength of Aramark at 3 out of 10, which indicates that the financial strength of Aramark is poor. This is the debt and cash of Aramark 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. Aramark has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $11.3 billion and loss of $2.72 a share. Its operating margin is -3.01%, which ranks in the middle range of the companies in Restaurants industry. Overall, the profitability of Aramark is ranked 5 out of 10, which indicates fair profitability. This is the revenue and net income of Aramark 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 Aramark is -4.3%, which ranks in the middle range of the companies in Restaurants industry. The 3-year average EBITDA growth is -36.5%, which ranks in the bottom 10% of the companies in Restaurants 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, Aramark's return on invested capital is -2.17, and its cost of capital is 9.35. The historical ROIC vs WACC comparison of Aramark is shown below:
In short, the stock of Aramark (NYSE:ARMK, 30-year Financials) is believed to be significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the bottom 10% of the companies in Restaurants industry. To learn more about Aramark stock, you can check out its 30-year Financials here.
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