Yahoo Finance Norsk Hydro ASA Stock Gives Every Indication Of Being Significantly Overvalued
- By GF Value
The stock of Norsk Hydro ASA (OTCPK:NHYDY, 30-year Financials) appears 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 $6.5 per share and the market cap of $13.3 billion, Norsk Hydro ASA stock appears to be significantly overvalued. GF Value for Norsk Hydro ASA is shown in the chart below.
Because Norsk Hydro ASA is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 8.1% over the past five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Norsk Hydro ASA has a cash-to-debt ratio of 0.72, which ranks worse than 76% of the companies in Metals & Mining industry. Based on this, GuruFocus ranks Norsk Hydro ASA's financial strength as 5 out of 10, suggesting fair balance sheet. This is the debt and cash of Norsk Hydro ASA 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. Norsk Hydro ASA has been profitable 7 over the past 10 years. Over the past twelve months, the company had a revenue of $14.7 billion and earnings of $0.293 a share. Its operating margin is 15.97%, which ranks better than 72% of the companies in Metals & Mining industry. Overall, the profitability of Norsk Hydro ASA is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Norsk Hydro ASA 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 Norsk Hydro ASA is 8.1%, which ranks better than 68% of the companies in Metals & Mining industry. The 3-year average EBITDA growth rate is -3.6%, which ranks worse than 66% of the companies in Metals & Mining 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, Norsk Hydro ASA's return on invested capital is 10.66, and its cost of capital is 10.02. The historical ROIC vs WACC comparison of Norsk Hydro ASA is shown below:
In summary, the stock of Norsk Hydro ASA (OTCPK:NHYDY, 30-year Financials) gives every indication of being significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks worse than 66% of the companies in Metals & Mining industry. To learn more about Norsk Hydro ASA stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
