T. Rowe Price Group Stock Appears To Be Modestly Overvalued
- By GF Value
The stock of T. Rowe Price Group (NAS:TROW, 30-year Financials) is believed to be 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 $188.44 per share and the market cap of $42.7 billion, T. Rowe Price Group stock gives every indication of being modestly overvalued. GF Value for T. Rowe Price Group is shown in the chart below.
Because T. Rowe Price Group is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 10.7% over the past three years and is estimated to grow 9.38% annually over the next three to five years.
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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. T. Rowe Price Group has a cash-to-debt ratio of 19.38, which is in the middle range of the companies in Asset Management industry. The overall financial strength of T. Rowe Price Group is 7 out of 10, which indicates that the financial strength of T. Rowe Price Group is fair. This is the debt and cash of T. Rowe Price Group 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. T. Rowe Price Group has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $6.6 billion and earnings of $11.78 a share. Its operating margin of 44.62% better than 74% of the companies in Asset Management industry. Overall, GuruFocus ranks T. Rowe Price Group's profitability as strong. This is the revenue and net income of T. Rowe Price Group 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 T. Rowe Price Group is 10.7%, which ranks better than 73% of the companies in Asset Management industry. The 3-year average EBITDA growth rate is 12.2%, which ranks in the middle range of the companies in Asset Management 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, T. Rowe Price Group's return on invested capital is 30.61, and its cost of capital is 8.48. The historical ROIC vs WACC comparison of T. Rowe Price Group is shown below:
Overall, the stock of T. Rowe Price Group (NAS:TROW, 30-year Financials) shows every sign of being modestly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Asset Management industry. To learn more about T. Rowe Price Group stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
