The stock of Global Medical REIT (NYSE:GMRE, 30-year Financials) gives every indication 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 $15.39 per share and the market cap of $935.6 million, Global Medical REIT stock shows every sign of being significantly overvalued. GF Value for Global Medical REIT is shown in the chart below.
Because Global Medical REIT is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 9.4% over the past 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. Global Medical REIT has a cash-to-debt ratio of 0.01, which ranks worse than 88% of the companies in REITs industry. Based on this, GuruFocus ranks Global Medical REIT's financial strength as 3 out of 10, suggesting poor balance sheet. This is the debt and cash of Global Medical REIT 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. Global Medical REIT has been profitable 2 over the past 10 years. Over the past twelve months, the company had a revenue of $99.4 million and loss of $0.166 a share. Its operating margin is 31.41%, which ranks worse than 67% of the companies in REITs industry. Overall, the profitability of Global Medical REIT is ranked 4 out of 10, which indicates poor profitability. This is the revenue and net income of Global Medical REIT 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 Global Medical REIT is 9.4%, which ranks better than 86% of the companies in REITs industry. The 3-year average EBITDA growth is 8.8%, which ranks better than 78% of the companies in REITs 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, Global Medical REIT's return on invested capital is 2.14, and its cost of capital is 5.33. The historical ROIC vs WACC comparison of Global Medical REIT is shown below:
In conclusion, Global Medical REIT (NYSE:GMRE, 30-year Financials) stock is believed to be significantly overvalued. The company's financial condition is poor and its profitability is poor. Its growth ranks better than 78% of the companies in REITs industry. To learn more about Global Medical REIT stock, you can check out its 30-year Financials here.
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