- By GF Value
The stock of Chembio Diagnostics (NAS:CEMI, 30-year Financials) shows every sign of being modestly undervalued, 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 $3.89 per share and the market cap of $78.5 million, Chembio Diagnostics stock appears to be modestly undervalued. GF Value for Chembio Diagnostics is shown in the chart below.
Because Chembio Diagnostics is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth.
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. Chembio Diagnostics has a cash-to-debt ratio of 0.91, which is in the middle range of the companies in the industry of Medical Diagnostics & Research. The overall financial strength of Chembio Diagnostics is 3 out of 10, which indicates that the financial strength of Chembio Diagnostics is poor. This is the debt and cash of Chembio Diagnostics 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. Chembio Diagnostics has been profitable 3 over the past 10 years. Over the past twelve months, the company had a revenue of $30.5 million and loss of $1.34 a share. Its operating margin is -72.08%, which ranks worse than 74% of the companies in the industry of Medical Diagnostics & Research. Overall, GuruFocus ranks the profitability of Chembio Diagnostics at 2 out of 10, which indicates poor profitability. This is the revenue and net income of Chembio Diagnostics 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 Chembio Diagnostics is -6.5%, which ranks worse than 73% of the companies in the industry of Medical Diagnostics & Research. The 3-year average EBITDA growth rate is -36.7%, which ranks in the bottom 10% of the companies in the industry of Medical Diagnostics & Research.
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, Chembio Diagnostics's return on invested capital is -65.38, and its cost of capital is 12.86. The historical ROIC vs WACC comparison of Chembio Diagnostics is shown below:
To conclude, the stock of Chembio Diagnostics (NAS:CEMI, 30-year Financials) shows every sign of being modestly undervalued. The company's financial condition is poor and its profitability is poor. Its growth ranks in the bottom 10% of the companies in the industry of Medical Diagnostics & Research. To learn more about Chembio Diagnostics stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.