The stock of Evolution AB (OTCPK:EVVTY, 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 $178.01 per share and the market cap of $37.8 billion, Evolution AB stock appears to be significantly overvalued. GF Value for Evolution AB is shown in the chart below.
Because Evolution AB is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 45.8% 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. Evolution AB has a cash-to-debt ratio of 5.90, which is better than 81% of the companies in Travel & Leisure industry. GuruFocus ranks the overall financial strength of Evolution AB at 8 out of 10, which indicates that the financial strength of Evolution AB is strong. This is the debt and cash of Evolution AB 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. Evolution AB has been profitable 9 years over the past 10 years. During the past 12 months, the company had revenues of $806.3 million and earnings of $2.136 a share. Its operating margin of 56.38% better than 99% of the companies in Travel & Leisure industry. Overall, GuruFocus ranks Evolution AB’s profitability as strong. This is the revenue and net income of Evolution AB 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. Evolution AB’s 3-year average revenue growth rate is better than 98% of the companies in Travel & Leisure industry. Evolution AB’s 3-year average EBITDA growth rate is 59.5%, which ranks better than 94% of the companies in Travel & Leisure 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, Evolution AB’s return on invested capital is 29.41, and its cost of capital is 6.40. The historical ROIC vs WACC comparison of Evolution AB is shown below:
In closing, Evolution AB (OTCPK:EVVTY, 30-year Financials) stock appears to be significantly overvalued. The company's financial condition is strong and its profitability is strong. Its growth ranks better than 94% of the companies in Travel & Leisure industry. To learn more about Evolution AB stock, you can check out its 30-year Financials here.
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