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Azure Power Global Stock Shows Every Sign Of Being Significantly Overvalued

- By GF Value

The stock of Azure Power Global (NYSE:AZRE, 30-year Financials) shows every sign of being 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 $27.09 per share and the market cap of $1.3 billion, Azure Power Global stock shows every sign of being significantly overvalued. GF Value for Azure Power Global is shown in the chart below.


Azure Power Global Stock Shows Every Sign Of Being Significantly Overvalued
Azure Power Global Stock Shows Every Sign Of Being Significantly Overvalued

Because Azure Power Global is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which is estimated to grow 20.63% annually over the next three to five years.

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

Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Azure Power Global has a cash-to-debt ratio of 0.09, which is worse than 71% of the companies in the industry of Utilities - Independent Power Producers. GuruFocus ranks the overall financial strength of Azure Power Global at 3 out of 10, which indicates that the financial strength of Azure Power Global is poor. This is the debt and cash of Azure Power Global over the past years:

Azure Power Global Stock Shows Every Sign Of Being Significantly Overvalued
Azure Power Global Stock Shows Every Sign Of Being Significantly Overvalued

It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Azure Power Global has been profitable 1 over the past 10 years. Over the past twelve months, the company had a revenue of $196.8 million and loss of $0.503 a share. Its operating margin is 45.19%, which ranks better than 89% of the companies in the industry of Utilities - Independent Power Producers. Overall, GuruFocus ranks the profitability of Azure Power Global at 6 out of 10, which indicates fair profitability. This is the revenue and net income of Azure Power Global over the past years:

Azure Power Global Stock Shows Every Sign Of Being Significantly Overvalued
Azure Power Global Stock Shows Every Sign Of Being Significantly Overvalued

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. Azure Power Global's 3-year average revenue growth rate is worse than 75% of the companies in the industry of Utilities - Independent Power Producers. Azure Power Global's 3-year average EBITDA growth rate is -10.1%, which ranks worse than 84% of the companies in the industry of Utilities - Independent Power Producers.

Another way to look at the profitability of a company is to compare its return on invested capital and the weighted 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. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Azure Power Global's return on invested capital is 5.70, and its cost of capital is 9.78. The historical ROIC vs WACC comparison of Azure Power Global is shown below:

Azure Power Global Stock Shows Every Sign Of Being Significantly Overvalued
Azure Power Global Stock Shows Every Sign Of Being Significantly Overvalued

To conclude, the stock of Azure Power Global (NYSE:AZRE, 30-year Financials) is estimated to be significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 84% of the companies in the industry of Utilities - Independent Power Producers. To learn more about Azure Power Global stock, you can check out its 30-year Financials here.

To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.

This article first appeared on GuruFocus.

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