The stock of Sumitomo Chemical Co (OTCPK:SOMMY, 30-year Financials) is estimated 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 $26.29 per share and the market cap of $8.6 billion, Sumitomo Chemical Co stock is estimated to be modestly overvalued. GF Value for Sumitomo Chemical Co is shown in the chart below.
Because Sumitomo Chemical Co is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 4.7% over the past five years.
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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Sumitomo Chemical Co has a cash-to-debt ratio of 0.29, which is worse than 74% of the companies in Chemicals industry. The overall financial strength of Sumitomo Chemical Co is 4 out of 10, which indicates that the financial strength of Sumitomo Chemical Co is poor. This is the debt and cash of Sumitomo Chemical Co 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. Sumitomo Chemical Co has been profitable 9 years over the past 10 years. During the past 12 months, the company had revenues of $20.9 billion and earnings of $0.461 a share. Its operating margin of 7.17% in the middle range of the companies in Chemicals industry. Overall, GuruFocus ranks Sumitomo Chemical Co's profitability as fair. This is the revenue and net income of Sumitomo Chemical Co 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 Sumitomo Chemical Co is 4.7%, which ranks in the middle range of the companies in Chemicals industry. The 3-year average EBITDA growth is 4.5%, which ranks in the middle range of the companies in Chemicals 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, Sumitomo Chemical Co's ROIC is 2.26 while its WACC came in at 4.00. The historical ROIC vs WACC comparison of Sumitomo Chemical Co is shown below:
To conclude, Sumitomo Chemical Co (OTCPK:SOMMY, 30-year Financials) stock is believed to be modestly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the middle range of the companies in Chemicals industry. To learn more about Sumitomo Chemical Co stock, you can check out its 30-year Financials here.
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