Mitsubishi Stock appears to be
Mitsubishi stock (TSE: 8058, 30-year financials) shows all signs of modest overvaluation, according to GuruFocus’s value calculation. The GuruFocus Value is GuruFocus’s estimate of the fair value at which the stock is to trade. It is calculated based on the historical multiples at which the stock has traded, the company’s past growth, and analysts’ estimates of the company’s future performance. If a stock’s price is significantly above the GF value line, it is overvalued and its future performance may be poor. On the other hand, if it is significantly below the GF value line, its future return is likely to be higher. At its current price of 3,060 yen per share and market capitalization of 4,525.7 billion yen, Mitsubishi shares are showing signs of being slightly overvalued. The GF value for Mitsubishi is shown in the table below.
Given that Mitsubishi is relatively overvalued, its long-term stock return is likely to be lower than its business growth, which has averaged 33.4% over the past five years.
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Investing in companies with low financial strength presents a higher risk of permanent loss of capital. Thus, it is important to carefully consider the financial strength of a company before deciding whether or not to buy its shares. Examining the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a business. Mitsubishi has a cash-to-debt ratio of 0.26, which is worse than 66% of companies in the conglomerate sector. GuruFocus ranks Mitsubishi’s overall financial strength as 4 out of 10, indicating that Mitsubishi’s financial strength is weak. Here is Mitsubishi’s debt and cash flow over the past few years:
It is less risky to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A business with high profit margins is also generally a safer investment than a business with low profit margins. Mitsubishi has been profitable 9 in the past 10 years. In the past twelve months, the company achieved sales of 12,460.8 billion yen and profit of 221.49 yen per share. Its operating margin is 1.72%, which ranks among the average for companies in the conglomerate industry. Overall, GuruFocus ranks Mitsubishi’s profitability as 6 out of 10, which indicates fair profitability. Here is Mitsubishi’s sales and bottom line for the past few years:
Growth is probably one of the most important factors in the valuation of a business. GuruFocus research has shown that growth is closely tied to the long-term performance of a company’s stocks. If a company’s business is growing, the business typically creates value for its shareholders, especially if the growth is profitable. Likewise, if the income and profits of a business decrease, the value of the business will decrease. Mitsubishi’s 3-year average revenue growth rate is over 93% for companies in the conglomerate sector. Mitsubishi’s 3-year average EBITDA growth rate is 12.2%, which ranks better than 69% of companies in the conglomerate sector.
Another method of determining a company’s profitability is to compare its return on invested capital to the weighted average cost of capital. Return on Invested Capital (ROIC) measures the extent to which a business 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 should pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies that the company creates value for the shareholders. In the past 12 months, Mitsubishi’s return on invested capital is 1.48 and its cost of capital is 2.71. Mitsubishi’s historical ROIC vs WACC comparison is shown below:
Overall, Mitsubishi stock (TSE: 8058, Finance at 30) shows all signs of modest overvaluation. The company’s financial situation is bad and its profitability is fair. Its growth ranks better than 69% of companies in the conglomerate industry. To learn more about the Mitsubishi stock, you can view its 30-year financial data here.
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