Lumos Pharma Stock Is Estimated To Be Significantly Overvalued
- By GF Value
The stock of Lumos Pharma (NAS:LUMO, 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 $11.58 per share and the market cap of $96.4 million, Lumos Pharma stock is believed to be significantly overvalued. GF Value for Lumos Pharma is shown in the chart below.
Because Lumos Pharma is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
Link: These companies may deliever higher future returns at reduced risk.
It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Lumos Pharma has a cash-to-debt ratio of 309.34, which is better than 79% of the companies in Biotechnology industry. The overall financial strength of Lumos Pharma is 6 out of 10, which indicates that the financial strength of Lumos Pharma is fair. This is the debt and cash of Lumos Pharma 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. Lumos Pharma has been profitable 1 over the past 10 years. Over the past twelve months, the company had a revenue of $0.2 million and loss of $0.89 a share. Its operating margin is -15656.55%, which ranks in the bottom 10% of the companies in Biotechnology industry. Overall, GuruFocus ranks the profitability of Lumos Pharma at 1 out of 10, which indicates poor profitability. This is the revenue and net income of Lumos Pharma 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 Lumos Pharma is -85.5%, which ranks in the bottom 10% of the companies in Biotechnology industry. The 3-year average EBITDA growth rate is 42.9%, which ranks better than 85% of the companies in Biotechnology industry.
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, Lumos Pharma's return on invested capital is -14.10, and its cost of capital is 12.40. The historical ROIC vs WACC comparison of Lumos Pharma is shown below:
In summary, The stock of Lumos Pharma (NAS:LUMO, 30-year Financials) shows every sign of being significantly overvalued. The company's financial condition is fair and its profitability is poor. Its growth ranks better than 85% of the companies in Biotechnology industry. To learn more about Lumos Pharma 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.
