The stock of Olympic Steel (NAS:ZEUS, 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 $34.52 per share and the market cap of $382.4 million, Olympic Steel stock is believed to be significantly overvalued. GF Value for Olympic Steel is shown in the chart below.
Because Olympic Steel is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
Link: These companies may deliever higher future returns at reduced risk.
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Olympic Steel has a cash-to-debt ratio of 0.04, which which ranks worse than 88% of the companies in Steel industry. The overall financial strength of Olympic Steel is 5 out of 10, which indicates that the financial strength of Olympic Steel is fair. This is the debt and cash of Olympic Steel 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. Olympic Steel has been profitable 6 years over the past 10 years. During the past 12 months, the company had revenues of $1.3 billion and earnings of $1.38 a share. Its operating margin of 2.17% in the middle range of the companies in Steel industry. Overall, GuruFocus ranks Olympic Steel's profitability as fair. This is the revenue and net income of Olympic Steel 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. Olympic Steel's 3-year average revenue growth rate is in the middle range of the companies in Steel industry. Olympic Steel's 3-year average EBITDA growth rate is -21.7%, which ranks worse than 84% of the companies in Steel 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, Olympic Steel's return on invested capital is 3.82, and its cost of capital is 8.62. The historical ROIC vs WACC comparison of Olympic Steel is shown below:
In closing, Olympic Steel (NAS:ZEUS, 30-year Financials) stock shows every sign of being significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks worse than 84% of the companies in Steel industry. To learn more about Olympic Steel 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.
