The stock of Metcash (ASX:MTS, 30-year Financials) shows every sign of being modestly 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 AUD 3.45 per share and the market cap of AUD 3.5 billion, Metcash stock is estimated to be modestly overvalued. GF Value for Metcash is shown in the chart below.
Because Metcash is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which is estimated to grow 0.18% 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. Metcash has a cash-to-debt ratio of 0.20, which is worse than 67% of the companies in the industry of Retail - Defensive. GuruFocus ranks the overall financial strength of Metcash at 5 out of 10, which indicates that the financial strength of Metcash is fair. This is the debt and cash of Metcash over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Metcash has been profitable 7 over the past 10 years. Over the past twelve months, the company had a revenue of AUD 13.8 billion and earnings of AUD 0.227 a share. Its operating margin is 2.81%, which ranks in the middle range of the companies in the industry of Retail - Defensive. Overall, the profitability of Metcash is ranked 5 out of 10, which indicates fair profitability. This is the revenue and net income of Metcash over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Metcash is -1%, which ranks worse than 71% of the companies in the industry of Retail - Defensive. The 3-year average EBITDA growth is -7.9%, which ranks worse than 82% of the companies in the industry of Retail - Defensive.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted 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 ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Metcash's ROIC was 11.97, while its WACC came in at -2.42. The historical ROIC vs WACC comparison of Metcash is shown below:
To conclude, The stock of Metcash (ASX:MTS, 30-year Financials) is estimated to be modestly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks worse than 82% of the companies in the industry of Retail - Defensive. To learn more about Metcash stock, you can check out its 30-year Financials here.
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