- By GF Value
The stock of Spark Networks SE (AMEX:LOV, 30-year Financials) gives every indication of being 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 $6.29 per share and the market cap of $163.9 million, Spark Networks SE stock is estimated to be modestly overvalued. GF Value for Spark Networks SE is shown in the chart below.
Because Spark Networks SE is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which is estimated to grow 11.47% annually over the next three to five years.
It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Spark Networks SE has a cash-to-debt ratio of 0.18, which is in the bottom 10% of the companies in Interactive Media industry. The overall financial strength of Spark Networks SE is 4 out of 10, which indicates that the financial strength of Spark Networks SE is poor. This is the debt and cash of Spark Networks SE 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. Spark Networks SE has been profitable 1 over the past 10 years. Over the past twelve months, the company had a revenue of $233 million and loss of $1.789 a share. Its operating margin is 7.75%, which ranks in the middle range of the companies in Interactive Media industry. Overall, GuruFocus ranks the profitability of Spark Networks SE at 4 out of 10, which indicates poor profitability. This is the revenue and net income of Spark Networks SE 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 stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Spark Networks SE is -41%, which ranks in the bottom 10% of the companies in Interactive Media industry. The 3-year average EBITDA growth rate is 30.6%, which ranks better than 67% of the companies in Interactive Media 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, Spark Networks SE's return on invested capital is 5.34, and its cost of capital is 11.97. The historical ROIC vs WACC comparison of Spark Networks SE is shown below:
In closing, the stock of Spark Networks SE (AMEX:LOV, 30-year Financials) appears to be modestly overvalued. The company's financial condition is poor and its profitability is poor. Its growth ranks better than 67% of the companies in Interactive Media industry. To learn more about Spark Networks SE stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.