- By GF Value
The stock of Fortuna Silver Mines (NYSE:FSM, 30-year Financials) is believed to be 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 $6.68 per share and the market cap of $1.2 billion, Fortuna Silver Mines stock gives every indication of being significantly overvalued. GF Value for Fortuna Silver Mines is shown in the chart below.
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FSM 15-Year Financial Data
The intrinsic value of FSM
Peter Lynch Chart of FSM
Because Fortuna Silver Mines is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which is estimated to grow 19.31% annually over the next three to 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. Fortuna Silver Mines has a cash-to-debt ratio of 0.75, which is worse than 74% of the companies in Metals & Mining industry. The overall financial strength of Fortuna Silver Mines is 6 out of 10, which indicates that the financial strength of Fortuna Silver Mines is fair. This is the debt and cash of Fortuna Silver Mines 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. Fortuna Silver Mines has been profitable 8 over the past 10 years. Over the past twelve months, the company had a revenue of $279 million and earnings of $0.11 a share. Its operating margin is 25.28%, which ranks better than 82% of the companies in Metals & Mining industry. Overall, the profitability of Fortuna Silver Mines is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Fortuna Silver Mines over the past years:
Growth is probably the most important factor 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. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Fortuna Silver Mines is -3.9%, which ranks in the middle range of the companies in Metals & Mining industry. The 3-year average EBITDA growth rate is -15.4%, which ranks worse than 77% of the companies in Metals & Mining 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, Fortuna Silver Mines's return on invested capital is 2.94, and its cost of capital is 7.19. The historical ROIC vs WACC comparison of Fortuna Silver Mines is shown below:
In closing, Fortuna Silver Mines (NYSE:FSM, 30-year Financials) stock shows every sign of being significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks worse than 77% of the companies in Metals & Mining industry. To learn more about Fortuna Silver Mines stock, you can check out its 30-year Financials here. To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener. This article first appeared on GuruFocus.