Hennessy Advisors Stock Appears To Be Significantly Overvalued

GuruFocus.com
·4 min read

- By GF Value

The stock of Hennessy Advisors (NAS:HNNA, 30-year Financials) shows every sign of being 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 $9.98 per share and the market cap of $73.5 million, Hennessy Advisors stock gives every indication of being significantly overvalued. GF Value for Hennessy Advisors is shown in the chart below.


Hennessy Advisors Stock Appears To Be Significantly Overvalued
Hennessy Advisors Stock Appears To Be Significantly Overvalued

Because Hennessy Advisors is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.

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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. Hennessy Advisors has a cash-to-debt ratio of 45.29, which ranks in the middle range of the companies in Asset Management industry. Based on this, GuruFocus ranks Hennessy Advisors's financial strength as 8 out of 10, suggesting strong balance sheet. This is the debt and cash of Hennessy Advisors over the past years:

Hennessy Advisors Stock Appears To Be Significantly Overvalued
Hennessy Advisors Stock Appears To Be Significantly Overvalued

Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Hennessy Advisors has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $30.9 million and earnings of $0.95 a share. Its operating margin of 32.32% better than 69% of the companies in Asset Management industry. Overall, GuruFocus ranks Hennessy Advisors's profitability as fair. This is the revenue and net income of Hennessy Advisors over the past years:

Hennessy Advisors Stock Appears To Be Significantly Overvalued
Hennessy Advisors Stock Appears To Be Significantly Overvalued

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. Hennessy Advisors's 3-year average revenue growth rate is in the middle range of the companies in Asset Management industry. Hennessy Advisors's 3-year average EBITDA growth rate is -20.8%, which ranks worse than 76% of the companies in Asset Management industry.

Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted 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 ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Hennessy Advisors's ROIC was 8.64, while its WACC came in at 7.22. The historical ROIC vs WACC comparison of Hennessy Advisors is shown below:

Hennessy Advisors Stock Appears To Be Significantly Overvalued
Hennessy Advisors Stock Appears To Be Significantly Overvalued

In short, the stock of Hennessy Advisors (NAS:HNNA, 30-year Financials) is estimated to be significantly overvalued. The company's financial condition is strong and its profitability is fair. Its growth ranks worse than 76% of the companies in Asset Management industry. To learn more about Hennessy Advisors stock, you can check out its 30-year Financials here.

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This article first appeared on GuruFocus.