- By GF Value
The stock of Simulations Plus (NAS:SLP, 30-year Financials) shows every sign of being modestly 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 $51.96 per share and the market cap of $1 billion, Simulations Plus stock is believed to be modestly overvalued. GF Value for Simulations Plus is shown in the chart below.
Because Simulations Plus is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 17.6% over the past five years.
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Simulations Plus has a cash-to-debt ratio of 76.81, which which ranks better than 90% of the companies in the industry of Healthcare Providers & Services. The overall financial strength of Simulations Plus is 9 out of 10, which indicates that the financial strength of Simulations Plus is strong. This is the debt and cash of Simulations Plus 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. Simulations Plus has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $45.7 million and earnings of $0.54 a share. Its operating margin is 27.58%, which ranks better than 95% of the companies in the industry of Healthcare Providers & Services. Overall, the profitability of Simulations Plus is ranked 9 out of 10, which indicates strong profitability. This is the revenue and net income of Simulations Plus 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 Simulations Plus is 17.6%, which ranks better than 80% of the companies in the industry of Healthcare Providers & Services. The 3-year average EBITDA growth rate is 9.7%, which ranks in the middle range of the companies in the industry of Healthcare Providers & Services.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). 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. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Simulations Plus's ROIC was 24.38, while its WACC came in at 0.59. The historical ROIC vs WACC comparison of Simulations Plus is shown below:
Overall, Simulations Plus (NAS:SLP, 30-year Financials) stock is estimated to be modestly overvalued. The company's financial condition is strong and its profitability is strong. Its growth ranks in the middle range of the companies in the industry of Healthcare Providers & Services. To learn more about Simulations Plus stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.