Olympia Financial Group Stock Is Believed To Be Modestly Overvalued

GuruFocus.com
·4 min read

- By GF Value

The stock of Olympia Financial Group (TSX:OLY, 30-year Financials) shows every sign of being modestly 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 C$50.5 per share and the market cap of C$117.9 million, Olympia Financial Group stock shows every sign of being modestly overvalued. GF Value for Olympia Financial Group is shown in the chart below.


Olympia Financial Group Stock Is Believed To Be Modestly Overvalued
Olympia Financial Group Stock Is Believed To Be Modestly Overvalued

Because Olympia Financial Group is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 5.4% 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. Olympia Financial Group has a cash-to-debt ratio of 2.66, which ranks in the middle range of the companies in Asset Management industry. Based on this, GuruFocus ranks Olympia Financial Group's financial strength as 7 out of 10, suggesting fair balance sheet. This is the debt and cash of Olympia Financial Group over the past years:

Olympia Financial Group Stock Is Believed To Be Modestly Overvalued
Olympia Financial Group Stock Is Believed To Be Modestly Overvalued

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. Olympia Financial Group has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of C$48.6 million and earnings of C$3.31 a share. Its operating margin is 24.25%, which ranks in the middle range of the companies in Asset Management industry. Overall, the profitability of Olympia Financial Group is ranked 9 out of 10, which indicates strong profitability. This is the revenue and net income of Olympia Financial Group over the past years:

Olympia Financial Group Stock Is Believed To Be Modestly Overvalued
Olympia Financial Group Stock Is Believed To Be Modestly 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. Olympia Financial Group's 3-year average revenue growth rate is better than 66% of the companies in Asset Management industry. Olympia Financial Group's 3-year average EBITDA growth rate is 7.8%, which ranks in the middle range of the companies in Asset Management industry.

Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Olympia Financial Group's return on invested capital is 30.77, and its cost of capital is 5.86. The historical ROIC vs WACC comparison of Olympia Financial Group is shown below:

Olympia Financial Group Stock Is Believed To Be Modestly Overvalued
Olympia Financial Group Stock Is Believed To Be Modestly Overvalued

In conclusion, the stock of Olympia Financial Group (TSX:OLY, 30-year Financials) shows every sign of being modestly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Asset Management industry. To learn more about Olympia Financial Group 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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