Is Edesa Biotech (NASDAQ: EDSA) Undervalued or Overvalued?

Today is Tuesday, December 3, 2019 and here’s your daily small cap valuation.

Edesa Biotech (NASDAQ: EDSA) is a small-cap stock that could have a lot of potential. But it’s hard to value smaller companies like this. Conventional valuation metrics like price-to-earnings (P/E) ratio, profit margin, and return on equity (ROE) may not be available for them.

To get a sense of Edesa Biotech's true valuation, let’s compare it to its industry peers — and to itself one year ago. We’ll look at four small cap valuation metrics…

Price-to-Book Value (P/B) Ratio

Edesa Biotech's price-to-book value (P/B) ratio of 5.822 is 24.40% higher than its industry average of 4.68. That’s not good. A high P/B ratio may indicate that there’s something wrong with the company’s balance sheet — or that the stock is trading for an unusually high price based on its balance sheet.

Free Cash Flow Yield (FCF/Enterprise Value)

Edesa Biotech's free cash flow yield (FCF/EV) of -16.60% is 525.64% lower than its industry average of 3.90%. That’s not good. This metric compares free cash flow (the amount of cash left over after all expenses and capital expenditures have been paid) with enterprise value (a comprehensive alternative to market cap that includes cash and debt).

A low free cash flow yield indicates that a company is performing inefficiently — or that it’s struggling with the debt on its books.

Earnings per Share (EPS) Growth

Edesa Biotech has grown its earnings per share (EPS) by 72.46% in the last year. That’s good. Many smaller, newer companies have negative earnings for a few years, but that’s okay as long as earnings are going up over time.

Gross Margin Growth

Edesa Biotech has grown its gross margin by 112.87% in the last year. That’s good. Many young small caps are unprofitable, so net profit margin isn’t always a useful measure. But a growing gross margin means that the company’s operations are getting more and more profitable over time.

The Takeaway

Edesa Biotech scored favorably on 2 of our 4 valuation metrics. With this in mind, we believe the stock is appropriately valued.

Editor’s Note: We’ve been keeping an eye on a set of small-cap stocks that are a better value than Edesa Biotech. These stocks have the potential for bigger gains — and they’re far less risky than the speculative small caps many investors gamble on. Enter your email below to learn more.