- By GF Value
The stock of O2Micro International (NAS:OIIM, 30-year Financials) shows every sign 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 $7.61 per share and the market cap of $207.3 million, O2Micro International stock is believed to be significantly overvalued. GF Value for O2Micro International is shown in the chart below.
Because O2Micro International is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 1.6% over the past five years.
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. O2Micro International has a cash-to-debt ratio of 16.17, which which ranks better than 78% of the companies in Semiconductors industry. The overall financial strength of O2Micro International is 7 out of 10, which indicates that the financial strength of O2Micro International is fair. This is the debt and cash of O2Micro International 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. O2Micro International has been profitable 3 over the past 10 years. Over the past twelve months, the company had a revenue of $78.3 million and earnings of $0.207 a share. Its operating margin is 7.90%, which ranks in the middle range of the companies in Semiconductors industry. Overall, GuruFocus ranks the profitability of O2Micro International at 3 out of 10, which indicates poor profitability. This is the revenue and net income of O2Micro International over the past years:
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. O2Micro International's 3-year average revenue growth rate is in the middle range of the companies in Semiconductors industry. O2Micro International's 3-year average EBITDA growth rate is -2.2%, which ranks worse than 69% of the companies in Semiconductors 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, O2Micro International's return on invested capital is 14.74, and its cost of capital is 6.46. The historical ROIC vs WACC comparison of O2Micro International is shown below:
In short, The stock of O2Micro International (NAS:OIIM, 30-year Financials) is believed to be significantly overvalued. The company's financial condition is fair and its profitability is poor. Its growth ranks worse than 69% of the companies in Semiconductors industry. To learn more about O2Micro International stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.