Global Water Resources Stock Is Believed To Be Significantly Overvalued
- By GF Value
The stock of Global Water Resources (NAS:GWRS, 30-year Financials) is believed 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 $16.52 per share and the market cap of $373.2 million, Global Water Resources stock is estimated to be significantly overvalued. GF Value for Global Water Resources is shown in the chart below.
Because Global Water Resources is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 2.5% over the past three years and is estimated to grow 5.91% annually over the next three to five years.
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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. Global Water Resources has a cash-to-debt ratio of 0.16, which is in the middle range of the companies in the industry of Utilities - Regulated. GuruFocus ranks the overall financial strength of Global Water Resources at 3 out of 10, which indicates that the financial strength of Global Water Resources is poor. This is the debt and cash of Global Water Resources over the past years:
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. Global Water Resources has been profitable 6 over the past 10 years. Over the past twelve months, the company had a revenue of $38.6 million and earnings of $0.05 a share. Its operating margin is 18.99%, which ranks in the middle range of the companies in the industry of Utilities - Regulated. Overall, GuruFocus ranks the profitability of Global Water Resources at 5 out of 10, which indicates fair profitability. This is the revenue and net income of Global Water Resources 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 Global Water Resources is 2.5%, which ranks in the middle range of the companies in the industry of Utilities - Regulated. The 3-year average EBITDA growth rate is -4%, which ranks worse than 75% of the companies in the industry of Utilities - Regulated.
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, Global Water Resources's return on invested capital is 1.66, and its cost of capital is 4.85. The historical ROIC vs WACC comparison of Global Water Resources is shown below:
In closing, The stock of Global Water Resources (NAS:GWRS, 30-year Financials) is believed to be significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 75% of the companies in the industry of Utilities - Regulated. To learn more about Global Water Resources stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
