– By GF Value
The stock of Digital Ally (NAS:DGLY, 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 $2.03 per share and the market cap of $104.6 million, Digital Ally stock is believed to be significantly overvalued. GF Value for Digital Ally is shown in the chart below.
Because Digital Ally is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Digital Ally has a cash-to-debt ratio of 4.38, which is better than 73% of the companies in Business Services industry. GuruFocus ranks the overall financial strength of Digital Ally at 7 out of 10, which indicates that the financial strength of Digital Ally is fair. This is the debt and cash of Digital Ally 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. Digital Ally has been profitable 0 over the past 10 years. Over the past twelve months, the company had a revenue of $10.5 million and loss of $0.18 a share. Its operating margin is -72.88%, which ranks in the bottom 10% of the companies in Business Services industry. Overall, GuruFocus ranks the profitability of Digital Ally at 1 out of 10, which indicates poor profitability. This is the revenue and net income of Digital Ally 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 Digital Ally is -38.5%, which ranks in the bottom 10% of the companies in Business Services industry. The 3-year average EBITDA growth rate is 60.9%, which ranks better than 96% of the companies in Business Services industry.
One can also evaluate a company’s profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). 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. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Digital Ally’s ROIC is -84.30 while its WACC came in at 6.31. The historical ROIC vs WACC comparison of Digital Ally is shown below:
To conclude, The stock of Digital Ally (NAS:DGLY, 30-year Financials) is believed to be significantly overvalued. The company’s financial condition is fair and its profitability is poor. Its growth ranks better than 96% of the companies in Business Services industry. To learn more about Digital Ally stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.