Korn Ferry Stock Is Estimated To Be Significantly Overvalued
- By GF Value
The stock of Korn Ferry (NYSE:KFY, 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 $67.14 per share and the market cap of $3.6 billion, Korn Ferry stock gives every indication of being significantly overvalued. GF Value for Korn Ferry is shown in the chart below.
Because Korn Ferry is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 8.2% 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. Korn Ferry has a cash-to-debt ratio of 1.22, which ranks in the middle range of the companies in Business Services industry. Based on this, GuruFocus ranks Korn Ferry's financial strength as 5 out of 10, suggesting fair balance sheet. This is the debt and cash of Korn Ferry 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. Korn Ferry has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $1.7 billion and earnings of $0.85 a share. Its operating margin is 9.52%, which ranks better than 71% of the companies in Business Services industry. Overall, GuruFocus ranks the profitability of Korn Ferry at 8 out of 10, which indicates strong profitability. This is the revenue and net income of Korn Ferry 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 performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Korn Ferry is 8.2%, which ranks better than 68% of the companies in Business Services industry. The 3-year average EBITDA growth rate is 10.1%, which ranks in the middle range of the companies in Business Services industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average 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 return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Korn Ferry's ROIC is 6.28 while its WACC came in at 10.81. The historical ROIC vs WACC comparison of Korn Ferry is shown below:
In short, Korn Ferry (NYSE:KFY, 30-year Financials) stock gives every indication of being significantly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Business Services industry. To learn more about Korn Ferry stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
