LPP SA Stock Shows Every Sign Of Being Modestly Overvalued
- By GF Value
The stock of LPP SA (WAR:LPP, 30-year Financials) is believed to be 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 z?10470 per share and the market cap of z?19.4 billion, LPP SA stock is believed to be modestly overvalued. GF Value for LPP SA is shown in the chart below.
Because LPP SA is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 3.5% over the past five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. LPP SA has a cash-to-debt ratio of 0.42, which which ranks in the middle range of the companies in the industry of Manufacturing - Apparel & Accessories. The overall financial strength of LPP SA is 4 out of 10, which indicates that the financial strength of LPP SA is poor. This is the debt and cash of LPP SA 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. LPP SA has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of z?7.8 billion and loss of z?103.43 a share. Its operating margin is 3.15%, which ranks in the middle range of the companies in the industry of Manufacturing - Apparel & Accessories. Overall, GuruFocus ranks the profitability of LPP SA at 8 out of 10, which indicates strong profitability. This is the revenue and net income of LPP SA 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 stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of LPP SA is 3.5%, which ranks better than 70% of the companies in the industry of Manufacturing - Apparel & Accessories. The 3-year average EBITDA growth rate is 8.4%, which ranks better than 67% of the companies in the industry of Manufacturing - Apparel & Accessories.
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, LPP SA's return on invested capital is 5.68, and its cost of capital is 11.46.
To conclude, LPP SA (WAR:LPP, 30-year Financials) stock is believed to be modestly overvalued. The company's financial condition is poor and its profitability is strong. Its growth ranks better than 67% of the companies in the industry of Manufacturing - Apparel & Accessories. To learn more about LPP SA stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
