- By GF Value
The stock of Ocean Bio-Chem (NAS:OBCI, 30-year Financials) gives every indication of being 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 $14.16 per share and the market cap of $134.3 million, Ocean Bio-Chem stock is believed to be significantly overvalued. GF Value for Ocean Bio-Chem is shown in the chart below.
Because Ocean Bio-Chem is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 12.7% over the past five years.
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. Ocean Bio-Chem has a cash-to-debt ratio of 2.56, which is better than 75% of the companies in Conglomerates industry. The overall financial strength of Ocean Bio-Chem is 8 out of 10, which indicates that the financial strength of Ocean Bio-Chem is strong. This is the debt and cash of Ocean Bio-Chem 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. Ocean Bio-Chem has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $60.9 million and earnings of $1.15 a share. Its operating margin is 22.90%, which ranks better than 92% of the companies in Conglomerates industry. Overall, the profitability of Ocean Bio-Chem is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of Ocean Bio-Chem 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 Ocean Bio-Chem is 12.7%, which ranks better than 81% of the companies in Conglomerates industry. The 3-year average EBITDA growth rate is 42.7%, which ranks better than 91% of the companies in Conglomerates 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, Ocean Bio-Chem's return on invested capital is 31.96, and its cost of capital is 3.85. The historical ROIC vs WACC comparison of Ocean Bio-Chem is shown below:
In conclusion, the stock of Ocean Bio-Chem (NAS:OBCI, 30-year Financials) is estimated to be significantly overvalued. The company's financial condition is strong and its profitability is strong. Its growth ranks better than 91% of the companies in Conglomerates industry. To learn more about Ocean Bio-Chem stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.