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Altium Stock Appears To Be Fairly Valued

- By GF Value

The stock of Altium (ASX:ALU, 30-year Financials) appears to be fairly valued, 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 AUD 37.08 per share and the market cap of AUD 5 billion, Altium stock gives every indication of being fairly valued. GF Value for Altium is shown in the chart below.


Altium Stock Appears To Be Fairly Valued
Altium Stock Appears To Be Fairly Valued

Because Altium is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 22.6% over the past three years and is estimated to grow 7.12% annually over the next three to five years.

Link: These companies may deliever higher future returns at reduced risk.

Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Altium has a cash-to-debt ratio of 6.68, which which ranks in the middle range of the companies in Software industry. The overall financial strength of Altium is 8 out of 10, which indicates that the financial strength of Altium is strong. This is the debt and cash of Altium over the past years:

Altium Stock Appears To Be Fairly Valued
Altium Stock Appears To Be Fairly Valued

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. Altium has been profitable 9 years over the past 10 years. During the past 12 months, the company had revenues of AUD 242.7 million and earnings of AUD 0.287 a share. Its operating margin of 28.86% better than 94% of the companies in Software industry. Overall, GuruFocus ranks Altium's profitability as strong. This is the revenue and net income of Altium over the past years:

Altium Stock Appears To Be Fairly Valued
Altium Stock Appears To Be Fairly Valued

One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Altium is 22.6%, which ranks better than 83% of the companies in Software industry. The 3-year average EBITDA growth is 36.1%, which ranks better than 80% of the companies in Software industry.

Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted 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 is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Altium's ROIC was 10.99, while its WACC came in at 8.47. The historical ROIC vs WACC comparison of Altium is shown below:

Altium Stock Appears To Be Fairly Valued
Altium Stock Appears To Be Fairly Valued

In closing, the stock of Altium (ASX:ALU, 30-year Financials) is believed to be fairly valued. The company's financial condition is strong and its profitability is strong. Its growth ranks better than 80% of the companies in Software industry. To learn more about Altium stock, you can check out its 30-year Financials here.

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This article first appeared on GuruFocus.