- By GF Value
The stock of Open Text (NAS:OTEX, 30-year Financials) appears 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 $47.71 per share and the market cap of $13 billion, Open Text stock is estimated to be fairly valued. GF Value for Open Text is shown in the chart below.
Because Open Text is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 9.2% over the past three years and is estimated to grow 1.40% annually over the next three to 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. Open Text has a cash-to-debt ratio of 0.39, which is worse than 83% of the companies in Software industry. The overall financial strength of Open Text is 4 out of 10, which indicates that the financial strength of Open Text is poor. This is the debt and cash of Open Text over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Open Text has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $3.3 billion and earnings of $0.33 a share. Its operating margin is 20.58%, which ranks better than 88% of the companies in Software industry. Overall, the profitability of Open Text is ranked 9 out of 10, which indicates strong profitability. This is the revenue and net income of Open Text over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Open Text is 9.2%, which ranks in the middle range of the companies in Software industry. The 3-year average EBITDA growth is 11.9%, which ranks in the middle range of the companies in Software 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, Open Text's return on invested capital is 1.58, and its cost of capital is 5.62. The historical ROIC vs WACC comparison of Open Text is shown below:
In short, the stock of Open Text (NAS:OTEX, 30-year Financials) is estimated to be fairly valued. The company's financial condition is poor and its profitability is strong. Its growth ranks in the middle range of the companies in Software industry. To learn more about Open Text stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.