The stock of Canon (NYSE:CAJ, 30-year Financials) gives every indication 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 $23.75 per share and the market cap of $24.8 billion, Canon stock is believed to be fairly valued. GF Value for Canon is shown in the chart below.
Because Canon is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Canon has a cash-to-debt ratio of 0.93, which ranks in the middle range of the companies in Hardware industry. Based on this, GuruFocus ranks Canon's financial strength as 7 out of 10, suggesting fair balance sheet. This is the debt and cash of Canon 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. Canon has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $30.3 billion and earnings of $0.957 a share. Its operating margin of 4.60% in the middle range of the companies in Hardware industry. Overall, GuruFocus ranks Canon's profitability as fair. This is the revenue and net income of Canon 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 Canon is -7.1%, which ranks worse than 72% of the companies in Hardware industry. The 3-year average EBITDA growth rate is -15.6%, which ranks worse than 81% of the companies in Hardware 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, Canon's return on invested capital is 3.07, and its cost of capital is 3.07. The historical ROIC vs WACC comparison of Canon is shown below:
In closing, Canon (NYSE:CAJ, 30-year Financials) stock is estimated to be fairly valued. The company's financial condition is fair and its profitability is fair. Its growth ranks worse than 81% of the companies in Hardware industry. To learn more about Canon stock, you can check out its 30-year Financials here.
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