Companhia De Saneamento Basico Do Estado De Sao Paulo (SBS): A Closer Look at Its Valuation
Companhia De Saneamento Basico Do Estado De Sao Paulo (NYSE:SBS) saw a daily gain of 4.29% and a 3-month gain of 6.5%. The company's Earnings Per Share (EPS) stands at 0.92. But is the stock modestly overvalued? This article provides an in-depth analysis to answer this question. Read on to explore the valuation, financial strength, profitability, and growth of the company.
Company Introduction
Companhia De Saneamento Basico Do Estado De Sao Paulo is a leading Brazilian water and waste management company. It holds a significant stake in the state of Sao Paulo and is recognized as one of the largest waste management companies globally. The company generates revenue through long-term agreements with municipal governments, often serving the majority of the market. The company's stock price is currently at $12.15, while its GF Value, an estimation of fair value, is at $10.71.
Understanding GF Value
The GF Value represents the intrinsic value of a stock derived from a unique method. The GF Value Line provides an overview of the fair value at which the stock should be traded. This value is calculated based on three factors: historical multiples at which the stock has traded, a GuruFocus adjustment factor based on the company's past performance and growth, and future business performance estimates.
The stock of Companhia De Saneamento Basico Do Estado De Sao Paulo (NYSE:SBS) is believed to be modestly overvalued based on GuruFocus' valuation method. The GF Value estimates the stock's fair value based on historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. Conversely, if the share price is significantly below the GF Value calculation, the stock may be undervalued and have higher future returns. At its current price of $12.15 per share, Companhia De Saneamento Basico Do Estado De Sao Paulo stock is believed to be modestly overvalued.
Since Companhia De Saneamento Basico Do Estado De Sao Paulo is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth.
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Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, it's crucial to review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Companhia De Saneamento Basico Do Estado De Sao Paulo has a cash-to-debt ratio of 0.12, which ranks worse than 68.45% of 485 companies in the Utilities - Regulated industry. Based on this, GuruFocus ranks Companhia De Saneamento Basico Do Estado De Sao Paulo's financial strength as 5 out of 10, suggesting a fair balance sheet.
Profitability and Growth
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. Companhia De Saneamento Basico Do Estado De Sao Paulo has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $4.60 billion and Earnings Per Share (EPS) of $0.92. Its operating margin is 21.16%, which ranks better than 73.32% of 506 companies in the Utilities - Regulated industry. Overall, the profitability of Companhia De Saneamento Basico Do Estado De Sao Paulo is ranked 9 out of 10, indicating strong profitability.
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 Companhia De Saneamento Basico Do Estado De Sao Paulo is 7%, which ranks worse than 52.88% of 486 companies in the Utilities - Regulated industry. The 3-year average EBITDA growth is 3.7%, which ranks worse than 52.51% of 459 companies in the Utilities - Regulated industry.
ROIC vs WACC
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, Companhia De Saneamento Basico Do Estado De Sao Paulo's ROIC was 6.85, while its WACC came in at 7.51.
Conclusion
In conclusion, the stock of Companhia De Saneamento Basico Do Estado De Sao Paulo (NYSE:SBS) is believed to be modestly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks worse than 52.51% of 459 companies in the Utilities - Regulated industry. To learn more about Companhia De Saneamento Basico Do Estado De Sao Paulo stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
