The stock of Document Security Systems (AMEX:DSS, 30-year Financials) shows every sign of being fairly valued, 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 $1.5 per share and the market cap of $101.4 million, Document Security Systems stock gives every indication of being fairly valued. GF Value for Document Security Systems is shown in the chart below.
Because Document Security Systems is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company’s financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Document Security Systems has a cash-to-debt ratio of 22.49, which which ranks better than 83% of the companies in Business Services industry. The overall financial strength of Document Security Systems is 7 out of 10, which indicates that the financial strength of Document Security Systems is fair. This is the debt and cash of Document Security Systems 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. Document Security Systems has been profitable 3 over the past 10 years. Over the past twelve months, the company had a revenue of $18.1 million and earnings of $0.031 a share. Its operating margin is -71.99%, which ranks in the bottom 10% of the companies in Business Services industry. Overall, GuruFocus ranks the profitability of Document Security Systems at 2 out of 10, which indicates poor profitability. This is the revenue and net income of Document Security Systems 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 Document Security Systems is -57.9%, which ranks in the bottom 10% of the companies in Business Services industry. The 3-year average EBITDA growth rate is -41.6%, which ranks in the bottom 10% of the companies in Business Services 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, Document Security Systems’s return on invested capital is 1.07, and its cost of capital is 12.41. The historical ROIC vs WACC comparison of Document Security Systems is shown below:
To conclude, Document Security Systems (AMEX:DSS, 30-year Financials) stock gives every indication of being fairly valued. The company's financial condition is fair and its profitability is poor. Its growth ranks in the bottom 10% of the companies in Business Services industry. To learn more about Document Security Systems stock, you can check out its 30-year Financials here.
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