The stock of Deswell Industries (NAS:DSWL, 30-year Financials) is estimated 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 $5.14 per share and the market cap of $81.8 million, Deswell Industries stock is estimated to be significantly overvalued. GF Value for Deswell Industries is shown in the chart below.
Because Deswell Industries is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 2.1% over the past five years.
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. Deswell Industries has a cash-to-debt ratio of 10000.00, which is better than 100% of the companies in Hardware industry. The overall financial strength of Deswell Industries is 9 out of 10, which indicates that the financial strength of Deswell Industries is strong. This is the debt and cash of Deswell Industries 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. Deswell Industries has been profitable 4 years over the past 10 years. During the past 12 months, the company had revenues of $64.9 million and earnings of $0.52 a share. Its operating margin of 5.03% in the middle range of the companies in Hardware industry. Overall, GuruFocus ranks Deswell Industries’s profitability as poor. This is the revenue and net income of Deswell Industries 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. Deswell Industries’s 3-year average revenue growth rate is in the middle range of the companies in Hardware industry. Deswell Industries’s 3-year average EBITDA growth rate is 7.2%, which ranks in the middle range of the companies in Hardware industry.
One can also evaluate a company’s profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). 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. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Deswell Industries’s ROIC is 7.88 while its WACC came in at 4.74. The historical ROIC vs WACC comparison of Deswell Industries is shown below:
To conclude, Deswell Industries (NAS:DSWL, 30-year Financials) stock shows every sign of being significantly overvalued. The company's financial condition is strong and its profitability is poor. Its growth ranks in the middle range of the companies in Hardware industry. To learn more about Deswell Industries stock, you can check out its 30-year Financials here.
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