- By GF Value
The stock of Hennessy Advisors (NAS:HNNA, 30-year Financials) appears 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 $9.16 per share and the market cap of $67.4 million, Hennessy Advisors stock gives every indication of being modestly overvalued. GF Value for Hennessy Advisors is shown in the chart below.
Because Hennessy Advisors is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Hennessy Advisors has a cash-to-debt ratio of 45.29, which is in the middle range of the companies in Asset Management industry. GuruFocus ranks the overall financial strength of Hennessy Advisors at 8 out of 10, which indicates that the financial strength of Hennessy Advisors is strong. This is the debt and cash of Hennessy Advisors 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. Hennessy Advisors has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $30.9 million and earnings of $0.95 a share. Its operating margin is 32.32%, which ranks better than 68% of the companies in Asset Management industry. Overall, the profitability of Hennessy Advisors is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Hennessy Advisors 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 Hennessy Advisors is -12.7%, which ranks in the middle range of the companies in Asset Management industry. The 3-year average EBITDA growth rate is -20.8%, which ranks worse than 75% of the companies in Asset Management industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted 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 ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Hennessy Advisors's ROIC was 8.64, while its WACC came in at 7.48. The historical ROIC vs WACC comparison of Hennessy Advisors is shown below:
In short, The stock of Hennessy Advisors (NAS:HNNA, 30-year Financials) is believed to be modestly overvalued. The company's financial condition is strong and its profitability is fair. Its growth ranks worse than 75% of the companies in Asset Management industry. To learn more about Hennessy Advisors stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.