The stock of Vipshop Holdings (NYSE:VIPS, 30-year Financials) appears to be 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 $30.77 per share and the market cap of $20.9 billion, Vipshop Holdings stock gives every indication of being significantly overvalued. GF Value for Vipshop Holdings is shown in the chart below.
Because Vipshop Holdings is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 8.7% over the past three years and is estimated to grow 16.81% annually over the next three to 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. Vipshop Holdings has a cash-to-debt ratio of 7.15, which is better than 86% of the companies in the industry of Retail - Cyclical. The overall financial strength of Vipshop Holdings is 8 out of 10, which indicates that the financial strength of Vipshop Holdings is strong. This is the debt and cash of Vipshop Holdings 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. Vipshop Holdings has been profitable 8 years over the past 10 years. During the past 12 months, the company had revenues of $15 billion and earnings of $1.259 a share. Its operating margin of 5.64% in the middle range of the companies in the industry of Retail - Cyclical. Overall, GuruFocus ranks Vipshop Holdings's profitability as fair. This is the revenue and net income of Vipshop Holdings 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 stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Vipshop Holdings is 8.7%, which ranks better than 76% of the companies in the industry of Retail - Cyclical. The 3-year average EBITDA growth rate is 26.4%, which ranks better than 79% of the companies in the industry of Retail - Cyclical.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Vipshop Holdings's return on invested capital is 15.88, and its cost of capital is 4.23. The historical ROIC vs WACC comparison of Vipshop Holdings is shown below:
Overall, the stock of Vipshop Holdings (NYSE:VIPS, 30-year Financials) shows every sign of being significantly overvalued. The company's financial condition is strong and its profitability is fair. Its growth ranks better than 79% of the companies in the industry of Retail - Cyclical. To learn more about Vipshop Holdings stock, you can check out its 30-year Financials here.
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