The stock of Evolution Petroleum (AMEX:EPM, 30-year Financials) is believed 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 $3.24 per share and the market cap of $108.5 million, Evolution Petroleum stock is believed to be fairly valued. GF Value for Evolution Petroleum is shown in the chart below.
Because Evolution Petroleum is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Evolution Petroleum has a cash-to-debt ratio of 168.45, which which ranks better than 85% of the companies in Oil & Gas industry. The overall financial strength of Evolution Petroleum is 7 out of 10, which indicates that the financial strength of Evolution Petroleum is fair. This is the debt and cash of Evolution Petroleum 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. Evolution Petroleum has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $22.4 million and loss of $0.56 a share. Its operating margin is -1.71%, which ranks in the middle range of the companies in Oil & Gas industry. Overall, the profitability of Evolution Petroleum is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Evolution Petroleum 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 Evolution Petroleum is -4.9%, which ranks in the middle range of the companies in Oil & Gas industry. The 3-year average EBITDA growth rate is -19.9%, which ranks worse than 73% of the companies in Oil & Gas 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, Evolution Petroleum's ROIC is -0.42 while its WACC came in at 12.02. The historical ROIC vs WACC comparison of Evolution Petroleum is shown below:
In conclusion, Evolution Petroleum (AMEX:EPM, 30-year Financials) stock shows every sign of being fairly valued. The company's financial condition is fair and its profitability is fair. Its growth ranks worse than 73% of the companies in Oil & Gas industry. To learn more about Evolution Petroleum stock, you can check out its 30-year Financials here.
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