The stock of Roche Holding AG (OTCPK:RHHBY, 30-year Financials) appears to be 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 $47.48 per share and the market cap of $324.1 billion, Roche Holding AG stock appears to be modestly overvalued. GF Value for Roche Holding AG is shown in the chart below.
Because Roche Holding AG is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 2.8% over the past three years and is estimated to grow 1.67% annually over the next three to five years.
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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. Roche Holding AG has a cash-to-debt ratio of 0.80, which is in the middle range of the companies in Drug Manufacturers industry. The overall financial strength of Roche Holding AG is 6 out of 10, which indicates that the financial strength of Roche Holding AG is fair. This is the debt and cash of Roche Holding AG over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Roche Holding AG has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $63.5 billion and earnings of $2.238 a share. Its operating margin is 31.79%, which ranks better than 95% of the companies in Drug Manufacturers industry. Overall, the profitability of Roche Holding AG is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of Roche Holding AG 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. Roche Holding AG’s 3-year average revenue growth rate is in the middle range of the companies in Drug Manufacturers industry. Roche Holding AG’s 3-year average EBITDA growth rate is 10.7%, which ranks in the middle range of the companies in Drug Manufacturers 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, Roche Holding AG’s return on invested capital is 22.61, and its cost of capital is 4.19. The historical ROIC vs WACC comparison of Roche Holding AG is shown below:
To conclude, the stock of Roche Holding AG (OTCPK:RHHBY, 30-year Financials) is believed to be modestly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Drug Manufacturers industry. To learn more about Roche Holding AG stock, you can check out its 30-year Financials here.
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