Recently, New Oriental Education & Technology Group Inc (EDU, Financial) reported a daily gain of 4.62 % and a 3-month gain of 49.46%. However, with an Earnings Per Share (EPS) of 1.1, the question arises - is the stock modestly overvalued? This article aims to answer that question by providing a comprehensive valuation analysis of the company. We encourage you to read on for a deeper understanding of the company's worth.
Company Overview
New Oriental Education & Technology Group Inc (EDU, Financial) is a leading private education provider in China. The company has undergone significant changes following a regulatory crackdown in 2021, which led to the termination of its K-9 academic after-school tutoring business. The company has since identified new initiatives such as nonacademic tutoring and intelligent learning systems and devices. It also maintains its high school academic after-school tutoring and overseas-related test preparation and consulting business. Notably, New Oriental Education & Technology Group owns 55.7% of East Buy (HKG: 01797), a market leader in livestreaming e-commerce.
With a current stock price of $56.49 per share, New Oriental Education & Technology Group's value seems to be modestly overvalued when compared to its GF Value of $49.92, an estimation of its fair value. This comparison forms the basis for our valuation analysis, which combines financial assessment with crucial company details.
Understanding GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. It is calculated based on historical trading multiples, an adjustment factor from GuruFocus based on the company's past performance and growth, and future business performance estimates.
The GF Value Line on our summary page provides an overview of the fair value at which the stock should ideally be trading. If the stock price is significantly above the GF Value Line, it is considered overvalued and its future return is likely to be poor. Conversely, if the stock price is significantly below the GF Value Line, its future return will likely be higher.
Based on this valuation method, New Oriental Education & Technology Group (EDU, Financial) appears to be modestly overvalued. This implies that the long-term return of its stock is likely to be lower than its business growth.
Financial Strength
Investing in companies with poor financial strength can lead to a high risk of permanent capital loss. To avoid this, it is essential to review a company's financial strength before deciding to purchase shares. Key indicators of financial strength include the cash-to-debt ratio and interest coverage. New Oriental Education & Technology Group has a cash-to-debt ratio of 8.72, which ranks better than 72.55% of 255 companies in the Education industry. The overall financial strength of New Oriental Education & Technology Group is 7 out of 10, indicating fair financial strength.
Profitability and Growth
Investing in profitable companies, especially those with consistent profitability over the long term, is generally less risky. A company with high profit margins is usually a safer investment than those with low profit margins. New Oriental Education & Technology Group has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $3 billion and Earnings Per Share (EPS) of $1.1. Its operating margin is 6.34%, which ranks worse than 52.73% of 256 companies in the Education industry. Overall, the profitability of New Oriental Education & Technology Group is ranked 7 out of 10, indicating fair profitability.
Growth is probably the most important factor in the valuation of a company. A faster-growing company creates more value for shareholders, especially if the growth is profitable. However, the 3-year average annual revenue growth of New Oriental Education & Technology Group is -9%, which ranks worse than 80.26% of 233 companies in the Education industry. The 3-year average EBITDA growth rate is -35.7%, which ranks worse than 93.44% of 183 companies in the Education industry.
ROIC vs WACC
Profitability can also be evaluated by comparing a company's 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 ROIC exceeds the WACC, the company is likely creating value for its shareholders. Over the past 12 months, New Oriental Education & Technology Group's ROIC is 5.2 while its WACC came in at 4.94.
Conclusion
In conclusion, the stock of New Oriental Education & Technology Group (EDU, Financial) appears to be modestly overvalued. The company's financial condition is fair, and its profitability is fair. However, its growth ranks worse than 93.44% of 183 companies in the Education industry. To learn more about New Oriental Education & Technology Group stock, you can check out its 30-Year Financials here.
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