The stock of Royal Dutch Shell PLC (NYSE:RDS.B, 30-year Financials) is estimated to be fairly valued, 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 $36.535 per share and the market cap of $146.7 billion, Royal Dutch Shell PLC stock appears to be fairly valued. GF Value for Royal Dutch Shell PLC is shown in the chart below.
Because Royal Dutch Shell PLC is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
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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. Royal Dutch Shell PLC has a cash-to-debt ratio of 0.29, which ranks in the middle range of the companies in Oil & Gas industry. Based on this, GuruFocus ranks Royal Dutch Shell PLC's financial strength as 4 out of 10, suggesting poor balance sheet. This is the debt and cash of Royal Dutch Shell PLC 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. Royal Dutch Shell PLC has been profitable 9 years over the past 10 years. During the past 12 months, the company had revenues of $180.5 billion and loss of $5.586 a share. Its operating margin of -14.29% worse than 70% of the companies in Oil & Gas industry. Overall, GuruFocus ranks Royal Dutch Shell PLC's profitability as fair. This is the revenue and net income of Royal Dutch Shell PLC 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 Royal Dutch Shell PLC is -14.4%, which ranks worse than 73% of the companies in Oil & Gas industry. The 3-year average EBITDA growth rate is -13.4%, which ranks worse than 67% of the companies in Oil & Gas 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, Royal Dutch Shell PLC's return on invested capital is -6.31, and its cost of capital is 6.43. The historical ROIC vs WACC comparison of Royal Dutch Shell PLC is shown below:
In summary, the stock of Royal Dutch Shell PLC (NYSE:RDS.B, 30-year Financials) is believed to be fairly valued. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 67% of the companies in Oil & Gas industry. To learn more about Royal Dutch Shell PLC stock, you can check out its 30-year Financials here.
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