Evolving Systems Stock Shows Every Sign Of Being Significantly Overvalued

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GF Value
Apr 20, 2021
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The stock of Evolving Systems (NAS:EVOL, 30-year Financials) shows every sign 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 $2.24 per share and the market cap of $27.5 million, Evolving Systems stock is estimated to be significantly overvalued. GF Value for Evolving Systems is shown in the chart below.

Evolving Systems GF Value Chart

Because Evolving Systems 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. Evolving Systems has a cash-to-debt ratio of 2.02, which is in the middle range of the companies in Software industry. GuruFocus ranks the overall financial strength of Evolving Systems at 6 out of 10, which indicates that the financial strength of Evolving Systems is fair. This is the debt and cash of Evolving Systems over the past years:

debt and cash

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. Evolving Systems has been profitable 8 years over the past 10 years. During the past 12 months, the company had revenues of $26.4 million and earnings of $0.053 a share. Its operating margin of 3.72% in the middle range of the companies in Software industry. Overall, GuruFocus ranks Evolving Systems's profitability as fair. This is the revenue and net income of Evolving Systems over the past years:

Revnue and Net Income

Growth is probably one of the most important factors 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. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Evolving Systems's 3-year average revenue growth rate is worse than 75% of the companies in Software industry. Evolving Systems's 3-year average EBITDA growth rate is -18.8%, which ranks worse than 85% of the companies in Software industry.

Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted 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 ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Evolving Systems's ROIC was 3.18, while its WACC came in at 8.85. The historical ROIC vs WACC comparison of Evolving Systems is shown below:

ROIC vs WACC

In closing, the stock of Evolving Systems (NAS:EVOL, 30-year Financials) is estimated to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks worse than 85% of the companies in Software industry. To learn more about Evolving Systems stock, you can check out its 30-year Financials here.

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