Precision Optics Stock Is Estimated To Be Fairly Valued

GuruFocus.com
·4 min read

- By GF Value

The stock of Precision Optics (OTCPK:PEYE, 30-year Financials) is estimated to be fairly valued, 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 $1.62 per share and the market cap of $21.4 million, Precision Optics stock shows every sign of being fairly valued. GF Value for Precision Optics is shown in the chart below.


Precision Optics Stock Is Estimated To Be Fairly Valued
Precision Optics Stock Is Estimated To Be Fairly Valued

Because Precision Optics is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 26.4% over the past five years.

Link: These companies may deliever higher future returns at reduced risk.

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. Precision Optics has a cash-to-debt ratio of 0.86, which ranks worse than 68% of the companies in the industry of Medical Devices & Instruments. Based on this, GuruFocus ranks Precision Optics's financial strength as 4 out of 10, suggesting poor balance sheet. This is the debt and cash of Precision Optics over the past years:

Precision Optics Stock Is Estimated To Be Fairly Valued
Precision Optics Stock Is Estimated To Be Fairly Valued

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. Precision Optics has been profitable 1 over the past 10 years. Over the past twelve months, the company had a revenue of $10.2 million and loss of $0.08 a share. Its operating margin is -9.81%, which ranks in the middle range of the companies in the industry of Medical Devices & Instruments. Overall, the profitability of Precision Optics is ranked 2 out of 10, which indicates poor profitability. This is the revenue and net income of Precision Optics over the past years:

Precision Optics Stock Is Estimated To Be Fairly Valued
Precision Optics Stock Is Estimated To Be Fairly Valued

One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Precision Optics is 26.4%, which ranks better than 86% of the companies in the industry of Medical Devices & Instruments. The 3-year average EBITDA growth is 4.5%, which ranks in the middle range of the companies in the industry of Medical Devices & Instruments.

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, Precision Optics's ROIC was -24.46, while its WACC came in at 5.09. The historical ROIC vs WACC comparison of Precision Optics is shown below:

Precision Optics Stock Is Estimated To Be Fairly Valued
Precision Optics Stock Is Estimated To Be Fairly Valued

To conclude, the stock of Precision Optics (OTCPK:PEYE, 30-year Financials) is believed to be fairly valued. The company's financial condition is poor and its profitability is poor. Its growth ranks in the middle range of the companies in the industry of Medical Devices & Instruments. To learn more about Precision Optics stock, you can check out its 30-year Financials here.

To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.

This article first appeared on GuruFocus.

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