The stock of RingCentral (NYSE:RNG, 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 $327.225 per share and the market cap of $29.6 billion, RingCentral stock is estimated to be significantly overvalued. GF Value for RingCentral is shown in the chart below.
Because RingCentral is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 26.4% over the past three years and is estimated to grow 22.26% annually over the next three to five years.
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. RingCentral has a cash-to-debt ratio of 0.44, which which ranks worse than 82% of the companies in Software industry. The overall financial strength of RingCentral is 3 out of 10, which indicates that the financial strength of RingCentral is poor. This is the debt and cash of RingCentral 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. RingCentral has been profitable 0 years over the past 10 years. During the past 12 months, the company had revenues of $1.2 billion and loss of $0.95 a share. Its operating margin of -9.57% worse than 71% of the companies in Software industry. Overall, GuruFocus ranks RingCentral's profitability as poor. This is the revenue and net income of RingCentral over the past years:
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. RingCentral's 3-year average revenue growth rate is better than 85% of the companies in Software industry. RingCentral's 3-year average EBITDA growth rate is 43.9%, which ranks better than 84% of the companies in Software 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, RingCentral's return on invested capital is -9.36, and its cost of capital is 5.64. The historical ROIC vs WACC comparison of RingCentral is shown below:
In closing, The stock of RingCentral (NYSE:RNG, 30-year Financials) is believed to be significantly overvalued. The company's financial condition is poor and its profitability is poor. Its growth ranks better than 84% of the companies in Software industry. To learn more about RingCentral stock, you can check out its 30-year Financials here.
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