The stock of Enghouse Systems (TSX:ENGH, 30-year Financials) is believed to be fairly valued, 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 C$56.73 per share and the market cap of C$3.1 billion, Enghouse Systems stock is believed to be fairly valued. GF Value for Enghouse Systems is shown in the chart below.
Because Enghouse Systems is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 14.9% over the past three years and is estimated to grow 11.19% 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. Enghouse Systems has a cash-to-debt ratio of 6.22, which is in the middle range of the companies in Software industry. The overall financial strength of Enghouse Systems is 8 out of 10, which indicates that the financial strength of Enghouse Systems is strong. This is the debt and cash of Enghouse Systems over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Enghouse Systems has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of C$512.2 million and earnings of C$1.84 a share. Its operating margin is 24.86%, which ranks better than 92% of the companies in Software industry. Overall, the profitability of Enghouse Systems is ranked 9 out of 10, which indicates strong profitability. This is the revenue and net income of Enghouse Systems 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 Enghouse Systems is 14.9%, which ranks better than 72% of the companies in Software industry. The 3-year average EBITDA growth rate is 23.8%, which ranks better than 70% of the companies in Software 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, Enghouse Systems's ROIC is 18.85 while its WACC came in at 6.82. The historical ROIC vs WACC comparison of Enghouse Systems is shown below:
In summary, the stock of Enghouse Systems (TSX:ENGH, 30-year Financials) is estimated to be fairly valued. The company's financial condition is strong and its profitability is strong. Its growth ranks better than 70% of the companies in Software industry. To learn more about Enghouse Systems stock, you can check out its 30-year Financials here.
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