Yahoo Finanzas Rio Tinto PLC Stock Is Estimated To Be Modestly Overvalued
- By GF Value
The stock of Rio Tinto PLC (NYSE:RIO, 30-year Financials) is estimated to be 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 $85.06 per share and the market cap of $135.1 billion, Rio Tinto PLC stock gives every indication of being modestly overvalued. GF Value for Rio Tinto PLC is shown in the chart below.
Because Rio Tinto PLC is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 7.1% over the past three years and is estimated to grow 1.77% annually over the next three to five years.
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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. Rio Tinto PLC has a cash-to-debt ratio of 0.82, which ranks worse than 74% of the companies in Metals & Mining industry. Based on this, GuruFocus ranks Rio Tinto PLC's financial strength as 6 out of 10, suggesting fair balance sheet. This is the debt and cash of Rio Tinto 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. Rio Tinto PLC has been profitable 8 years over the past 10 years. During the past 12 months, the company had revenues of $44.6 billion and earnings of $5.998 a share. Its operating margin of 40.37% better than 93% of the companies in Metals & Mining industry. Overall, GuruFocus ranks Rio Tinto PLC's profitability as strong. This is the revenue and net income of Rio Tinto PLC 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 stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Rio Tinto PLC is 7.1%, which ranks better than 67% of the companies in Metals & Mining industry. The 3-year average EBITDA growth rate is 8%, which ranks in the middle range of the companies in Metals & Mining industry.
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). 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. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Rio Tinto PLC's ROIC is 15.99 while its WACC came in at 5.03. The historical ROIC vs WACC comparison of Rio Tinto PLC is shown below:
To conclude, The stock of Rio Tinto PLC (NYSE:RIO, 30-year Financials) gives every indication of being modestly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Metals & Mining industry. To learn more about Rio Tinto PLC stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
