Today is Monday, December 30, 2019 and here’s your daily small cap valuation.
Franchise Group (NASDAQ: FRG) 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 Franchise Group’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
Franchise Group’s price-to-book value (P/B) ratio of 3.572 is 34.69% lower than its industry average of 5.469. 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)
Franchise Group’s free cash flow yield (FCF/EV) of 1.29% is 66.14% lower than its industry average of 3.81%. 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
Franchise Group has grown its earnings per share (EPS) by 147.54% 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
Franchise Group has grown its gross margin by 213.68% 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.
Franchise Group scored favorably on 3 of our 4 valuation metrics. With this in mind, we believe the stock is slightly undervalued.
Editor’s Note: We’ve been keeping an eye on a set of small-cap stocks that are a better value than Franchise Group. 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.