Resources Connection Stock Shows Every Sign Of Being Fairly Valued

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May 20, 2021
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The stock of Resources Connection (NAS:RGP, 30-year Financials) shows every sign of being 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 $14.3 per share and the market cap of $469.4 million, Resources Connection stock gives every indication of being fairly valued. GF Value for Resources Connection is shown in the chart below.

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Because Resources Connection is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 7.8% over the past 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. Resources Connection has a cash-to-debt ratio of 0.96, which is in the middle range of the companies in Business Services industry. The overall financial strength of Resources Connection is 7 out of 10, which indicates that the financial strength of Resources Connection is fair. This is the debt and cash of Resources Connection over the past years:

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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. Resources Connection has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $635.8 million and earnings of $0.19 a share. Its operating margin is 2.35%, which ranks in the middle range of the companies in Business Services industry. Overall, the profitability of Resources Connection is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Resources Connection over the past years:

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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 Resources Connection is 7.8%, which ranks better than 69% of the companies in Business Services industry. The 3-year average EBITDA growth rate is 9.6%, which ranks in the middle range of the companies in Business Services 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, Resources Connection's return on invested capital is 1.77, and its cost of capital is 6.83. The historical ROIC vs WACC comparison of Resources Connection is shown below:

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In short, the stock of Resources Connection (NAS:RGP, 30-year Financials) is believed to be fairly valued. The company's financial condition is fair and its profitability is fair. Its growth ranks in the middle range of the companies in Business Services industry. To learn more about Resources Connection stock, you can check out its 30-year Financials here.

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