- By GF Value
The stock of Freedom Holding (NAS:FRHC, 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 $56.61 per share and the market cap of $3.3 billion, Freedom Holding stock is estimated to be significantly overvalued. GF Value for Freedom Holding is shown in the chart below.
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FRHC 15-Year Financial Data
The intrinsic value of FRHC
Peter Lynch Chart of FRHC
Because Freedom Holding is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 211.4% over the past five years.
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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. Freedom Holding has a cash-to-debt ratio of 4.21, which is in the middle range of the companies in Capital Markets industry. The overall financial strength of Freedom Holding is 4 out of 10, which indicates that the financial strength of Freedom Holding is poor. This is the debt and cash of Freedom Holding over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Freedom Holding has been profitable 5 over the past 10 years. Over the past twelve months, the company had a revenue of $252.5 million and earnings of $1.56 a share. Its operating margin is 42.04%, which ranks better than 78% of the companies in Capital Markets industry. Overall, GuruFocus ranks the profitability of Freedom Holding at 4 out of 10, which indicates poor profitability. This is the revenue and net income of Freedom Holding 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. Freedom Holding's 3-year average revenue growth rate is better than 99% of the companies in Capital Markets industry. Freedom Holding's 3-year average EBITDA growth rate is 187.5%, which ranks better than 98% of the companies in Capital Markets 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, Freedom Holding's return on invested capital is 13.08, and its cost of capital is 8.11. The historical ROIC vs WACC comparison of Freedom Holding is shown below:
Overall, Freedom Holding (NAS:FRHC, 30-year Financials) stock is estimated to be significantly overvalued. The company's financial condition is poor and its profitability is poor. Its growth ranks better than 98% of the companies in Capital Markets industry. To learn more about Freedom Holding stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.