The stock of MV Oil Trust (NYSE:MVO, 30-year Financials) appears 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 $5.5356 per share and the market cap of $63.7 million, MV Oil Trust stock shows every sign of being significantly overvalued. GF Value for MV Oil Trust is shown in the chart below.
Because MV Oil Trust is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
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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. MV Oil Trust has a cash-to-debt ratio of 10000.00, which ranks better than 100% of the companies in Oil & Gas industry. Based on this, GuruFocus ranks MV Oil Trust's financial strength as 8 out of 10, suggesting strong balance sheet. This is the debt and cash of MV Oil Trust 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. MV Oil Trust has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $6.8 million and earnings of $0.49 a share. Its operating margin is 83.00%, which ranks better than 99% of the companies in Oil & Gas industry. Overall, the profitability of MV Oil Trust is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of MV Oil Trust over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of MV Oil Trust is -9.4%, which ranks in the middle range of the companies in Oil & Gas industry. The 3-year average EBITDA growth is -12%, which ranks in the middle range of the companies in Oil & Gas 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, MV Oil Trust's return on invested capital is 50.34, and its cost of capital is 11.96. The historical ROIC vs WACC comparison of MV Oil Trust is shown below:
In short, MV Oil Trust (NYSE:MVO, 30-year Financials) stock shows every sign of being significantly overvalued. The company's financial condition is strong and its profitability is fair. Its growth ranks in the middle range of the companies in Oil & Gas industry. To learn more about MV Oil Trust stock, you can check out its 30-year Financials here.
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