The stock of Tronox Holdings PLC (NYSE:TROX, 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 $22.59 per share and the market cap of $3.5 billion, Tronox Holdings PLC stock is estimated to be significantly overvalued. GF Value for Tronox Holdings PLC is shown in the chart below.
Because Tronox Holdings PLC is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 10.2% over the past three years and is estimated to grow 12.49% annually over the next three to five years.
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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. Tronox Holdings PLC has a cash-to-debt ratio of 0.18, which is worse than 83% of the companies in Chemicals industry. GuruFocus ranks the overall financial strength of Tronox Holdings PLC at 3 out of 10, which indicates that the financial strength of Tronox Holdings PLC is poor. This is the debt and cash of Tronox Holdings PLC 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. Tronox Holdings PLC has been profitable 2 over the past 10 years. Over the past twelve months, the company had a revenue of $2.9 billion and earnings of $6.58 a share. Its operating margin is 9.93%, which ranks in the middle range of the companies in Chemicals industry. Overall, GuruFocus ranks the profitability of Tronox Holdings PLC at 4 out of 10, which indicates poor profitability. This is the revenue and net income of Tronox Holdings PLC 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 Tronox Holdings PLC is 10.2%, which ranks better than 75% of the companies in Chemicals industry. The 3-year average EBITDA growth rate is 20.3%, which ranks better than 78% of the companies in Chemicals 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, Tronox Holdings PLC's ROIC is 50.27 while its WACC came in at 22.29. The historical ROIC vs WACC comparison of Tronox Holdings PLC is shown below:
In closing, the stock of Tronox Holdings PLC (NYSE:TROX, 30-year Financials) shows every sign of being significantly overvalued. The company's financial condition is poor and its profitability is poor. Its growth ranks better than 78% of the companies in Chemicals industry. To learn more about Tronox Holdings PLC stock, you can check out its 30-year Financials here.
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