The stock of Westlake Chemical (NYSE:WLK, 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 $97.91 per share and the market cap of $12.5 billion, Westlake Chemical stock is estimated to be significantly overvalued. GF Value for Westlake Chemical is shown in the chart below.
Because Westlake Chemical is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which is estimated to grow 1.09% annually over the next three to five years.
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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. Westlake Chemical has a cash-to-debt ratio of 0.33, which which ranks worse than 70% of the companies in Chemicals industry. The overall financial strength of Westlake Chemical is 5 out of 10, which indicates that the financial strength of Westlake Chemical is fair. This is the debt and cash of Westlake Chemical 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. Westlake Chemical has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $7.5 billion and earnings of $2.56 a share. Its operating margin of 6.20% in the middle range of the companies in Chemicals industry. Overall, GuruFocus ranks Westlake Chemical's profitability as strong. This is the revenue and net income of Westlake Chemical 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 Westlake Chemical is -1.9%, which ranks worse than 68% of the companies in Chemicals industry. The 3-year average EBITDA growth rate is -11.9%, which ranks worse than 81% of the companies in Chemicals industry.
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, Westlake Chemical's return on invested capital is 4.62, and its cost of capital is 9.10. The historical ROIC vs WACC comparison of Westlake Chemical is shown below:
In short, The stock of Westlake Chemical (NYSE:WLK, 30-year Financials) is estimated to be significantly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks worse than 81% of the companies in Chemicals industry. To learn more about Westlake Chemical stock, you can check out its 30-year Financials here.
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