The stock of Avista (NYSE:AVA, 30-year Financials) shows every sign of being 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 $47.03 per share and the market cap of $3.3 billion, Avista stock shows every sign of being modestly overvalued. GF Value for Avista is shown in the chart below.
Because Avista is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth.
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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. Avista has a cash-to-debt ratio of 0.01, which which ranks in the bottom 10% of the companies in the industry of Utilities - Regulated. The overall financial strength of Avista is 3 out of 10, which indicates that the financial strength of Avista is poor. This is the debt and cash of Avista over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Avista has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $1.3 billion and earnings of $1.91 a share. Its operating margin is 17.60%, which ranks in the middle range of the companies in the industry of Utilities - Regulated. Overall, GuruFocus ranks the profitability of Avista at 6 out of 10, which indicates fair profitability. This is the revenue and net income of Avista 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 Avista is -4.5%, which ranks worse than 83% of the companies in the industry of Utilities - Regulated. The 3-year average EBITDA growth is -2%, which ranks worse than 71% of the companies in the industry of Utilities - Regulated.
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, Avista's return on invested capital is 3.49, and its cost of capital is 4.99. The historical ROIC vs WACC comparison of Avista is shown below:
In short, The stock of Avista (NYSE:AVA, 30-year Financials) is estimated to be modestly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 71% of the companies in the industry of Utilities - Regulated. To learn more about Avista stock, you can check out its 30-year Financials here.
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