The stock of Emerson Radio (AMEX:MSN, 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 $1.02 per share and the market cap of $21.5 million, Emerson Radio stock gives every indication of being significantly overvalued. GF Value for Emerson Radio is shown in the chart below.
Because Emerson Radio is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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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. Emerson Radio has a cash-to-debt ratio of 60.54, which is better than 87% of the companies in Hardware industry. GuruFocus ranks the overall financial strength of Emerson Radio at 7 out of 10, which indicates that the financial strength of Emerson Radio is fair. This is the debt and cash of Emerson Radio 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. Emerson Radio has been profitable 5 years over the past 10 years. During the past 12 months, the company had revenues of $7 million and loss of $0.2 a share. Its operating margin of -60.93% in the bottom 10% of the companies in Hardware industry. Overall, GuruFocus ranks Emerson Radio's profitability as poor. This is the revenue and net income of Emerson Radio 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 performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Emerson Radio is -27.5%, which ranks in the bottom 10% of the companies in Hardware industry. The 3-year average EBITDA growth rate is -349%, which ranks in the bottom 10% of the companies in Hardware 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, Emerson Radio's ROIC is -146.76 while its WACC came in at 3.90.
In short, the stock of Emerson Radio (AMEX:MSN, 30-year Financials) is estimated to be significantly overvalued. The company's financial condition is fair and its profitability is poor. Its growth ranks in the bottom 10% of the companies in Hardware industry. To learn more about Emerson Radio stock, you can check out its 30-year Financials here.
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