- By GF Value
The stock of The Descartes Systems Group (NAS:DSGX, 30-year Financials) gives every indication 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 $64.64 per share and the market cap of $5.5 billion, The Descartes Systems Group stock is estimated to be modestly overvalued. GF Value for The Descartes Systems Group is shown in the chart below.
Because The Descartes Systems Group is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 10.6% over the past three years and is estimated to grow 16.77% annually over the next three to five years.
It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. The Descartes Systems Group has a cash-to-debt ratio of 10.86, which is better than 66% of the companies in Software industry. The overall financial strength of The Descartes Systems Group is 8 out of 10, which indicates that the financial strength of The Descartes Systems Group is strong. This is the debt and cash of The Descartes Systems Group over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. The Descartes Systems Group has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $363.8 million and earnings of $0.68 a share. Its operating margin is 22.27%, which ranks better than 90% of the companies in Software industry. Overall, the profitability of The Descartes Systems Group is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of The Descartes Systems Group 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 The Descartes Systems Group is 10.6%, which ranks in the middle range of the companies in Software industry. The 3-year average EBITDA growth rate is 18.5%, which ranks in the middle range of the companies in Software 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, The Descartes Systems Group's return on invested capital is 6.57, and its cost of capital is 7.87. The historical ROIC vs WACC comparison of The Descartes Systems Group is shown below:
To conclude, The Descartes Systems Group (NAS:DSGX, 30-year Financials) stock is believed to be modestly overvalued. The company's financial condition is strong and its profitability is strong. Its growth ranks in the middle range of the companies in Software industry. To learn more about The Descartes Systems Group stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.