The stock of Magic Software Enterprises (NAS:MGIC, 30-year Financials) is believed 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 $15.78 per share and the market cap of $761.7 million, Magic Software Enterprises stock appears to be modestly overvalued. GF Value for Magic Software Enterprises is shown in the chart below.
Because Magic Software Enterprises is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 9.3% over the past five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Magic Software Enterprises has a cash-to-debt ratio of 1.82, which which ranks in the middle range of the companies in Software industry. The overall financial strength of Magic Software Enterprises is 7 out of 10, which indicates that the financial strength of Magic Software Enterprises is fair. This is the debt and cash of Magic Software Enterprises 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. Magic Software Enterprises has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $371.2 million and earnings of $0.49 a share. Its operating margin is 11.23%, which ranks better than 73% of the companies in Software industry. Overall, the profitability of Magic Software Enterprises is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of Magic Software Enterprises 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. Magic Software Enterprises's 3-year average revenue growth rate is in the middle range of the companies in Software industry. Magic Software Enterprises's 3-year average EBITDA growth rate is 9%, which ranks in the middle range of the companies in Software industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted 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 ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Magic Software Enterprises's ROIC was 12.14, while its WACC came in at 6.69. The historical ROIC vs WACC comparison of Magic Software Enterprises is shown below:
In summary, the stock of Magic Software Enterprises (NAS:MGIC, 30-year Financials) is believed to be 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 Software industry. To learn more about Magic Software Enterprises stock, you can check out its 30-year Financials here.
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