Gevo Stock Appears To Be Significantly Overvalued
- By GF Value
The stock of Gevo (NAS:GEVO, 30-year Financials) is estimated to be 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 $8.59 per share and the market cap of $1.7 billion, Gevo stock shows every sign of being significantly overvalued. GF Value for Gevo is shown in the chart below.
Because Gevo is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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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. Gevo has a cash-to-debt ratio of 61.88, which is better than 87% of the companies in Chemicals industry. GuruFocus ranks the overall financial strength of Gevo at 6 out of 10, which indicates that the financial strength of Gevo is fair. This is the debt and cash of Gevo 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. Gevo has been profitable 0 over the past 10 years. Over the past twelve months, the company had a revenue of $5.3 million and loss of $1.28 a share. Its operating margin is -491.17%, which ranks in the bottom 10% of the companies in Chemicals industry. Overall, the profitability of Gevo is ranked 1 out of 10, which indicates poor profitability. This is the revenue and net income of Gevo 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 stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Gevo is -85.9%, which ranks in the bottom 10% of the companies in Chemicals industry. The 3-year average EBITDA growth rate is 68.7%, which ranks better than 97% of the companies in Chemicals industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Gevo's return on invested capital is -32.28, and its cost of capital is 25.62. The historical ROIC vs WACC comparison of Gevo is shown below:
To conclude, The stock of Gevo (NAS:GEVO, 30-year Financials) is believed to be significantly overvalued. The company's financial condition is fair and its profitability is poor. Its growth ranks better than 97% of the companies in Chemicals industry. To learn more about Gevo 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.
