– By GF Value
The stock of Eldorado Gold (NYSE:EGO, 30-year Financials) appears to be modestly undervalued, 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 $11.32 per share and the market cap of $2 billion, Eldorado Gold stock is believed to be modestly undervalued. GF Value for Eldorado Gold is shown in the chart below.
Because Eldorado Gold is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth, which averaged 31.2% over the past 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. Eldorado Gold has a cash-to-debt ratio of 0.97, which is worse than 71% of the companies in Metals & Mining industry. The overall financial strength of Eldorado Gold is 6 out of 10, which indicates that the financial strength of Eldorado Gold is fair. This is the debt and cash of Eldorado Gold over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Eldorado Gold has been profitable 5 over the past 10 years. Over the past twelve months, the company had a revenue of $1 billion and earnings of $0.59 a share. Its operating margin is 25.37%, which ranks better than 82% of the companies in Metals & Mining industry. Overall, the profitability of Eldorado Gold is ranked 6 out of 10, which indicates fair profitability. This is the revenue and net income of Eldorado Gold 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. Eldorado Gold’s 3-year average revenue growth rate is better than 90% of the companies in Metals & Mining industry. Eldorado Gold’s 3-year average EBITDA growth rate is 72.3%, which ranks better than 98% of the companies in Metals & Mining 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, Eldorado Gold’s return on invested capital is 3.27, and its cost of capital is 8.96. The historical ROIC vs WACC comparison of Eldorado Gold is shown below:
In short, the stock of Eldorado Gold (NYSE:EGO, 30-year Financials) gives every indication of being modestly undervalued. The company’s financial condition is fair and its profitability is fair. Its growth ranks better than 98% of the companies in Metals & Mining industry. To learn more about Eldorado Gold stock, you can check out its 30-year Financials here.
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