- By GF Value
The stock of Tencent Holdings (OTCPK:TCEHY, 30-year Financials) shows every sign of being 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 $78.13 per share and the market cap of $749.6 billion, Tencent Holdings stock appears to be fairly valued. GF Value for Tencent Holdings is shown in the chart below.
Because Tencent Holdings is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 26.1% over the past three years and is estimated to grow 21.62% annually over the next three to 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. Tencent Holdings has a cash-to-debt ratio of 0.87, which which ranks worse than 82% of the companies in Interactive Media industry. The overall financial strength of Tencent Holdings is 6 out of 10, which indicates that the financial strength of Tencent Holdings is fair. This is the debt and cash of Tencent Holdings 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. Tencent Holdings has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $70.5 billion and earnings of $2.43 a share. Its operating margin is 26.27%, which ranks better than 84% of the companies in Interactive Media industry. Overall, the profitability of Tencent Holdings is ranked 9 out of 10, which indicates strong profitability. This is the revenue and net income of Tencent Holdings 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 Tencent Holdings is 26.1%, which ranks better than 75% of the companies in Interactive Media industry. The 3-year average EBITDA growth rate is 27%, which ranks in the middle range of the companies in Interactive Media industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average 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 return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Tencent Holdings's ROIC is 11.82 while its WACC came in at 8.17.
In short, the stock of Tencent Holdings (OTCPK:TCEHY, 30-year Financials) is estimated to be fairly valued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Interactive Media industry. To learn more about Tencent Holdings stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.