- By GF Value
The stock of Ganfeng Lithium Co (OTCPK:GNENF, 30-year Financials) is believed to be 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 $13.2 per share and the market cap of $21 billion, Ganfeng Lithium Co stock appears to be significantly overvalued. GF Value for Ganfeng Lithium Co is shown in the chart below.
Because Ganfeng Lithium Co is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 2.6% over the past five years.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Ganfeng Lithium Co has a cash-to-debt ratio of 0.37, which is worse than 68% of the companies in Chemicals industry. GuruFocus ranks the overall financial strength of Ganfeng Lithium Co at 5 out of 10, which indicates that the financial strength of Ganfeng Lithium Co is fair. This is the debt and cash of Ganfeng Lithium Co 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. Ganfeng Lithium Co has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $808.9 million and earnings of $0.119 a share. Its operating margin is 16.02%, which ranks better than 79% of the companies in Chemicals industry. Overall, the profitability of Ganfeng Lithium Co is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of Ganfeng Lithium Co over the past years:
Growth is probably one of the most important factors 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. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Ganfeng Lithium Co's 3-year average revenue growth rate is in the middle range of the companies in Chemicals industry. Ganfeng Lithium Co's 3-year average EBITDA growth rate is -9.1%, which ranks worse than 76% of the companies in Chemicals industry.
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, Ganfeng Lithium Co's return on invested capital is 6.05, and its cost of capital is 12.03. The historical ROIC vs WACC comparison of Ganfeng Lithium Co is shown below:
In summary, the stock of Ganfeng Lithium Co (OTCPK:GNENF, 30-year Financials) appears to be significantly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks worse than 76% of the companies in Chemicals industry. To learn more about Ganfeng Lithium Co stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.