The stock of Aristocrat Leisure (OTCPK:ARLUF, 30-year Financials) gives every indication 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 $31.11 per share and the market cap of $20.3 billion, Aristocrat Leisure stock appears to be modestly overvalued. GF Value for Aristocrat Leisure is shown in the chart below.
Because Aristocrat Leisure is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 19.1% over the past three years and is estimated to grow 8.58% 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. Aristocrat Leisure has a cash-to-debt ratio of 0.52, which is worse than 89% of the companies in Interactive Media industry. The overall financial strength of Aristocrat Leisure is 5 out of 10, which indicates that the financial strength of Aristocrat Leisure is fair. This is the debt and cash of Aristocrat Leisure 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. Aristocrat Leisure has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $3.1 billion and earnings of $0.501 a share. Its operating margin is 16.93%, which ranks better than 71% of the companies in Interactive Media industry. Overall, the profitability of Aristocrat Leisure is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of Aristocrat Leisure 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 stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Aristocrat Leisure is 19.1%, which ranks better than 68% of the companies in Interactive Media industry. The 3-year average EBITDA growth rate is -8.4%, which ranks worse than 77% of the companies in Interactive Media 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, Aristocrat Leisure’s return on invested capital is 11.11, and its cost of capital is 10.89. The historical ROIC vs WACC comparison of Aristocrat Leisure is shown below:
To conclude, the stock of Aristocrat Leisure (OTCPK:ARLUF, 30-year Financials) gives every indication of being modestly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks worse than 77% of the companies in Interactive Media industry. To learn more about Aristocrat Leisure stock, you can check out its 30-year Financials here.
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