The stock of Pax Global Technology (HKSE:00327, 30-year Financials) is believed 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 HK$8.2 per share and the market cap of HK$8.9 billion, Pax Global Technology stock is believed to be significantly overvalued. GF Value for Pax Global Technology is shown in the chart below.
Because Pax Global Technology is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 17% over the past five years.
Link: These companies may deliever higher future returns at reduced risk.
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. Pax Global Technology has a cash-to-debt ratio of 31.23, which ranks better than 84% of the companies in Industrial Products industry. Based on this, GuruFocus ranks Pax Global Technology's financial strength as 8 out of 10, suggesting strong balance sheet. This is the debt and cash of Pax Global Technology 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. Pax Global Technology has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of HK$5.7 billion and earnings of HK$0.823 a share. Its operating margin of 19.39% better than 91% of the companies in Industrial Products industry. Overall, GuruFocus ranks Pax Global Technology's profitability as strong. This is the revenue and net income of Pax Global Technology 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. Pax Global Technology's 3-year average revenue growth rate is better than 86% of the companies in Industrial Products industry. Pax Global Technology's 3-year average EBITDA growth rate is 22.8%, which ranks better than 80% of the companies in Industrial Products industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Pax Global Technology's return on invested capital is 46.32, and its cost of capital is 8.69. The historical ROIC vs WACC comparison of Pax Global Technology is shown below:
In conclusion, the stock of Pax Global Technology (HKSE:00327, 30-year Financials) is estimated to be significantly overvalued. The company's financial condition is strong and its profitability is strong. Its growth ranks better than 80% of the companies in Industrial Products industry. To learn more about Pax Global Technology stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
