The stock of Grange Resources (ASX:GRR, 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 AUD 0.545 per share and the market cap of AUD 630.8 million, Grange Resources stock is believed to be significantly overvalued. GF Value for Grange Resources is shown in the chart below.
Because Grange Resources is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 26.6% 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. Grange Resources has a cash-to-debt ratio of 12.33, which is in the middle range of the companies in Metals & Mining industry. The overall financial strength of Grange Resources is 8 out of 10, which indicates that the financial strength of Grange Resources is strong. This is the debt and cash of Grange Resources 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. Grange Resources has been profitable 8 over the past 10 years. Over the past twelve months, the company had a revenue of AUD 502.6 million and earnings of AUD 0.176 a share. Its operating margin is 39.89%, which ranks better than 93% of the companies in Metals & Mining industry. Overall, the profitability of Grange Resources is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of Grange Resources 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 Grange Resources is 26.6%, which ranks better than 89% of the companies in Metals & Mining industry. The 3-year average EBITDA growth is 46.5%, which ranks better than 88% of the companies in Metals & Mining 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, Grange Resources's return on invested capital is 35.37, and its cost of capital is 10.64. The historical ROIC vs WACC comparison of Grange Resources is shown below:
In short, Grange Resources (ASX:GRR, 30-year Financials) stock is estimated to be significantly overvalued. The company's financial condition is strong and its profitability is strong. Its growth ranks better than 88% of the companies in Metals & Mining industry. To learn more about Grange Resources stock, you can check out its 30-year Financials here.
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