Yahoo Finance Twin Disc Stock Is Believed To Be Significantly Overvalued
- By GF Value
The stock of Twin Disc (NAS:TWIN, 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 $12.16 per share and the market cap of $165.9 million, Twin Disc stock is believed to be significantly overvalued. GF Value for Twin Disc is shown in the chart below.
Because Twin Disc is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 7.8% 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. Twin Disc has a cash-to-debt ratio of 0.20, which ranks worse than 85% of the companies in Industrial Products industry. Based on this, GuruFocus ranks Twin Disc's financial strength as 4 out of 10, suggesting poor balance sheet. This is the debt and cash of Twin Disc 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. Twin Disc has been profitable 7 over the past 10 years. Over the past twelve months, the company had a revenue of $211.6 million and loss of $0.76 a share. Its operating margin is -3.67%, which ranks worse than 82% of the companies in Industrial Products industry. Overall, GuruFocus ranks the profitability of Twin Disc at 5 out of 10, which indicates fair profitability. This is the revenue and net income of Twin Disc 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. Twin Disc's 3-year average revenue growth rate is better than 68% of the companies in Industrial Products industry. Twin Disc's 3-year average EBITDA growth rate is -126.1%, which ranks in the bottom 10% of the companies in Industrial Products 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, Twin Disc's return on invested capital is -2.48, and its cost of capital is 8.39. The historical ROIC vs WACC comparison of Twin Disc is shown below:
In summary, Twin Disc (NAS:TWIN, 30-year Financials) stock is believed to be significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks in the bottom 10% of the companies in Industrial Products industry. To learn more about Twin Disc stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
