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Mitsubishi Stock Appears To Be Modestly Overvalued

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GF Value
Jun 14, 2021
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The stock of Mitsubishi (TSE:8058, 30-year Financials) shows every sign of being modestly 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 ¥3060 per share and the market cap of ¥4525.7 billion, Mitsubishi stock gives every indication of being modestly overvalued. GF Value for Mitsubishi is shown in the chart below.


Because Mitsubishi is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 33.4% over the past five years.

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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. Mitsubishi has a cash-to-debt ratio of 0.26, which is worse than 66% of the companies in Conglomerates industry. GuruFocus ranks the overall financial strength of Mitsubishi at 4 out of 10, which indicates that the financial strength of Mitsubishi is poor. This is the debt and cash of Mitsubishi 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. Mitsubishi has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of ¥12460.8 billion and earnings of ¥221.49 a share. Its operating margin is 1.72%, which ranks in the middle range of the companies in Conglomerates industry. Overall, GuruFocus ranks the profitability of Mitsubishi at 6 out of 10, which indicates fair profitability. This is the revenue and net income of Mitsubishi 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. Mitsubishi’s 3-year average revenue growth rate is better than 93% of the companies in Conglomerates industry. Mitsubishi’s 3-year average EBITDA growth rate is 12.2%, which ranks better than 69% of the companies in Conglomerates industry.

Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Mitsubishi’s return on invested capital is 1.48, and its cost of capital is 2.71. The historical ROIC vs WACC comparison of Mitsubishi is shown below:


Overall, Mitsubishi (TSE:8058, 30-year Financials) stock shows every sign of being modestly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks better than 69% of the companies in Conglomerates industry. To learn more about Mitsubishi stock, you can check out its 30-year Financials here.

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