The stock of Diana Shipping (NYSE:DSX, 30-year Financials) is believed 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 $3.74 per share and the market cap of $342.3 million, Diana Shipping stock is estimated to be significantly overvalued. GF Value for Diana Shipping is shown in the chart below.
Because Diana Shipping is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 5.2% over the past three years and is estimated to grow 0.21% annually over the next three to five years.
Link: These companies may deliever higher future returns at reduced risk.
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. Diana Shipping has a cash-to-debt ratio of 0.15, which is worse than 70% of the companies in Transportation industry. The overall financial strength of Diana Shipping is 3 out of 10, which indicates that the financial strength of Diana Shipping is poor. This is the debt and cash of Diana Shipping 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. Diana Shipping has been profitable 3 over the past 10 years. Over the past twelve months, the company had a revenue of $169.7 million and loss of $1.62 a share. Its operating margin is -4.24%, which ranks worse than 75% of the companies in Transportation industry. Overall, GuruFocus ranks the profitability of Diana Shipping at 3 out of 10, which indicates poor profitability. This is the revenue and net income of Diana Shipping over the past years:
Growth is probably one of the most important factors 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. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Diana Shipping's 3-year average revenue growth rate is better than 67% of the companies in Transportation industry. Diana Shipping's 3-year average EBITDA growth rate is 41.9%, which ranks better than 93% of the companies in Transportation industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted 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. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Diana Shipping's return on invested capital is -0.84, and its cost of capital is 6.77. The historical ROIC vs WACC comparison of Diana Shipping is shown below:
Overall, the stock of Diana Shipping (NYSE:DSX, 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 93% of the companies in Transportation industry. To learn more about Diana Shipping stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
