American Resources Stock Is Estimated To Be Significantly Overvalued
- By GF Value
The stock of American Resources (NAS:AREC, 30-year Financials) gives every indication of being 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 $2.92 per share and the market cap of $151.6 million, American Resources stock is believed to be significantly overvalued. GF Value for American Resources is shown in the chart below.
Because American Resources 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. American Resources has a cash-to-debt ratio of 0.29, which ranks in the middle range of the companies in Steel industry. Based on this, GuruFocus ranks American Resources's financial strength as 1 out of 10, suggesting poor balance sheet. This is the debt and cash of American Resources over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. American Resources has been profitable 0 years over the past 10 years. During the past 12 months, the company had revenues of $0.5 million and loss of $0.365 a share. Its operating margin of -3320.66% in the bottom 10% of the companies in Steel industry. Overall, GuruFocus ranks American Resources's profitability as poor. This is the revenue and net income of American Resources 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 American Resources is -88.9%, which ranks in the bottom 10% of the companies in Steel industry. The 3-year average EBITDA growth rate is 78.1%, which ranks better than 98% of the companies in Steel 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, American Resources's return on invested capital is -38.97, and its cost of capital is -1.46. The historical ROIC vs WACC comparison of American Resources is shown below:
Overall, the stock of American Resources (NAS:AREC, 30-year Financials) is believed to be significantly overvalued. The company's financial condition is poor and its profitability is poor. Its growth ranks better than 98% of the companies in Steel industry. To learn more about American Resources stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
