- By GF Value
The stock of Ecopetrol SA (NYSE:EC, 30-year Financials) is estimated 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 $13.03 per share and the market cap of $26.8 billion, Ecopetrol SA stock shows every sign of being fairly valued. GF Value for Ecopetrol SA is shown in the chart below.
Because Ecopetrol SA is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
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. Ecopetrol SA has a cash-to-debt ratio of 0.14, which which ranks worse than 70% of the companies in Oil & Gas industry. The overall financial strength of Ecopetrol SA is 4 out of 10, which indicates that the financial strength of Ecopetrol SA is poor. This is the debt and cash of Ecopetrol SA 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. Ecopetrol SA has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $14.4 billion and earnings of $0.621 a share. Its operating margin is 18.38%, which ranks better than 81% of the companies in Oil & Gas industry. Overall, the profitability of Ecopetrol SA is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Ecopetrol SA 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 performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Ecopetrol SA is -3.5%, which ranks in the middle range of the companies in Oil & Gas industry. The 3-year average EBITDA growth rate is -12.3%, which ranks in the middle range of the companies in Oil & Gas industry.
One can also evaluate a company's profitability by comparing its 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 return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Ecopetrol SA's ROIC is 4.60 while its WACC came in at 10.23. The historical ROIC vs WACC comparison of Ecopetrol SA is shown below:
Overall, Ecopetrol SA (NYSE:EC, 30-year Financials) stock appears to be fairly valued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the middle range of the companies in Oil & Gas industry. To learn more about Ecopetrol SA stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.