Ikonics Stock Shows Every Sign Of Being Significantly Overvalued
- By GF Value
The stock of Ikonics (NAS:IKNX, 30-year Financials) is estimated 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 $10.0555 per share and the market cap of $19.9 million, Ikonics stock appears to be significantly overvalued. GF Value for Ikonics is shown in the chart below.
Because Ikonics 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. Ikonics has a cash-to-debt ratio of 1.37, which ranks in the middle range of the companies in Chemicals industry. Based on this, GuruFocus ranks Ikonics's financial strength as 6 out of 10, suggesting fair balance sheet. This is the debt and cash of Ikonics 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. Ikonics has been profitable 6 over the past 10 years. Over the past twelve months, the company had a revenue of $13.4 million and loss of $0.23 a share. Its operating margin is -13.30%, which ranks in the bottom 10% of the companies in Chemicals industry. Overall, GuruFocus ranks the profitability of Ikonics at 4 out of 10, which indicates poor profitability. This is the revenue and net income of Ikonics over the past years:
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 Ikonics is -7.5%, which ranks worse than 84% of the companies in Chemicals industry. The 3-year average EBITDA growth is -32%, which ranks in the bottom 10% 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, Ikonics's return on invested capital is -10.21, and its cost of capital is 7.55. The historical ROIC vs WACC comparison of Ikonics is shown below:
In short, the stock of Ikonics (NAS:IKNX, 30-year Financials) is believed to be significantly overvalued. The company's financial condition is fair and its profitability is poor. Its growth ranks in the bottom 10% of the companies in Chemicals industry. To learn more about Ikonics stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
