Today is Monday, October 28, 2019 and here’s your daily small cap valuation.
Encore Wire Corporation (NASDAQ: WIRE) 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 Encore Wire Corporation’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
Encore Wire Corporation’s price-to-book value (P/B) ratio of 1.703 is 12.13% lower than its industry average of 1.938. That’s good. A low P/B ratio indicates that the company has a solid balance sheet — and that based on its balance sheet, the stock is trading for unusually cheap.
Free Cash Flow Yield (FCF/Enterprise Value)
Encore Wire Corporation’s free cash flow yield (FCF/EV) of 7.67% is 108.99% higher than its industry average of 3.67%. That’s 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 high free cash flow yield indicates that a company is performing efficiently — and that it’s in a good position to repay any debt on its books.
Earnings per Share (EPS) Growth
Encore Wire Corporation has grown its earnings per share (EPS) by 11.37% 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
Encore Wire Corporation has grown its gross margin by 3.18% 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
Encore Wire Corporation scored favorably on 4 of our 4 valuation metrics. With this in mind, we believe the stock is very undervalued.
Editor’s Note: We’ve been keeping an eye on a set of small-cap stocks that are a better value than Encore Wire Corporation. 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.
