- By GF Value
The stock of The One Group Hospitality (NAS:STKS, 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 $11.79 per share and the market cap of $355.6 million, The One Group Hospitality stock is estimated to be significantly overvalued. GF Value for The One Group Hospitality is shown in the chart below.
Because The One Group Hospitality is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 16.1% over the past five years.
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. The One Group Hospitality has a cash-to-debt ratio of 0.15, which is worse than 70% of the companies in Restaurants industry. GuruFocus ranks the overall financial strength of The One Group Hospitality at 2 out of 10, which indicates that the financial strength of The One Group Hospitality is poor. This is the debt and cash of The One Group Hospitality 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. The One Group Hospitality has been profitable 4 years over the past 10 years. During the past 12 months, the company had revenues of $151.7 million and loss of $0.278 a share. Its operating margin of -2.34% in the middle range of the companies in Restaurants industry. Overall, GuruFocus ranks The One Group Hospitality's profitability as poor. This is the revenue and net income of The One Group Hospitality 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. The One Group Hospitality's 3-year average revenue growth rate is better than 91% of the companies in Restaurants industry. The One Group Hospitality's 3-year average EBITDA growth rate is 13.2%, which ranks better than 71% of the companies in Restaurants industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average 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 return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, The One Group Hospitality's ROIC is -1.26 while its WACC came in at 14.40. The historical ROIC vs WACC comparison of The One Group Hospitality is shown below:
To conclude, The One Group Hospitality (NAS:STKS, 30-year Financials) stock gives every indication of being significantly overvalued. The company's financial condition is poor and its profitability is poor. Its growth ranks better than 71% of the companies in Restaurants industry. To learn more about The One Group Hospitality stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.