The stock of Sinopec Shanghai Petrochemical Co (NYSE:SHI, 30-year Financials) shows every sign of being 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 $25.67 per share and the market cap of $2.8 billion, Sinopec Shanghai Petrochemical Co stock shows every sign of being significantly overvalued. GF Value for Sinopec Shanghai Petrochemical Co is shown in the chart below.
Because Sinopec Shanghai Petrochemical Co 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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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. Sinopec Shanghai Petrochemical Co has a cash-to-debt ratio of 2.66, which which ranks better than 71% of the companies in Oil & Gas industry. The overall financial strength of Sinopec Shanghai Petrochemical Co is 6 out of 10, which indicates that the financial strength of Sinopec Shanghai Petrochemical Co is fair. This is the debt and cash of Sinopec Shanghai Petrochemical Co 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. Sinopec Shanghai Petrochemical Co has been profitable 8 over the past 10 years. Over the past twelve months, the company had a revenue of $9.1 billion and earnings of $1.098 a share. Its operating margin is -1.27%, which ranks in the middle range of the companies in Oil & Gas industry. Overall, GuruFocus ranks the profitability of Sinopec Shanghai Petrochemical Co at 5 out of 10, which indicates fair profitability. This is the revenue and net income of Sinopec Shanghai Petrochemical Co 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 Sinopec Shanghai Petrochemical Co is -8.1%, which ranks in the middle range of the companies in Oil & Gas industry. The 3-year average EBITDA growth rate is -36.4%, which ranks worse than 85% 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, Sinopec Shanghai Petrochemical Co's return on invested capital is -2.92, and its cost of capital is 4.29. The historical ROIC vs WACC comparison of Sinopec Shanghai Petrochemical Co is shown below:
In conclusion, the stock of Sinopec Shanghai Petrochemical Co (NYSE:SHI, 30-year Financials) appears to be significantly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks worse than 85% of the companies in Oil & Gas industry. To learn more about Sinopec Shanghai Petrochemical Co stock, you can check out its 30-year Financials here.
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