Yahoo Finance Royal Dutch Shell PLC Stock Is Estimated To Be Modestly Overvalued
- By GF Value
The stock of Royal Dutch Shell PLC (NYSE:RDS.A, 30-year Financials) shows every sign 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 $40.99 per share and the market cap of $154.9 billion, Royal Dutch Shell PLC stock is believed to be modestly overvalued. GF Value for Royal Dutch Shell PLC is shown in the chart below.
Because Royal Dutch Shell PLC is relatively overvalued, the long-term return of its stock is likely to be lower than its 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. Royal Dutch Shell PLC has a cash-to-debt ratio of 0.30, which ranks in the middle range of the companies in Oil & Gas industry. Based on this, GuruFocus ranks Royal Dutch Shell PLC's financial strength as 4 out of 10, suggesting poor balance sheet. This is the debt and cash of Royal Dutch Shell PLC 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. Royal Dutch Shell PLC has been profitable 9 years over the past 10 years. During the past 12 months, the company had revenues of $176.2 billion and loss of $4.14 a share. Its operating margin of -12.60% worse than 69% of the companies in Oil & Gas industry. Overall, GuruFocus ranks Royal Dutch Shell PLC's profitability as fair. This is the revenue and net income of Royal Dutch Shell PLC over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Royal Dutch Shell PLC is -14.4%, which ranks worse than 72% of the companies in Oil & Gas industry. The 3-year average EBITDA growth is -13.4%, which ranks worse than 67% of the companies in Oil & Gas 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, Royal Dutch Shell PLC's return on invested capital is -5.47, and its cost of capital is 6.18. The historical ROIC vs WACC comparison of Royal Dutch Shell PLC is shown below:
In closing, the stock of Royal Dutch Shell PLC (NYSE:RDS.A, 30-year Financials) is estimated to be modestly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks worse than 67% of the companies in Oil & Gas industry. To learn more about Royal Dutch Shell PLC stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
