Today is Wednesday, July 8, 2020 and here’s your daily small cap valuation.
Sleep Number Corporation (NASDAQ: SNBR) 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 Sleep Number 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
Sleep Number Corporation’s price-to-book value (P/B) ratio is undefined. That’s not good. P/B is a fraction, and an undefined value generally means that there’s a zero or negative number in the denominator (book value). It could also mean that the company has failed to report its book value. Either way, we have to fault the stock for this.
Free Cash Flow Yield (FCF/Enterprise Value)
Sleep Number Corporation’s free cash flow yield (FCF/EV) of 10.62% is 190.96% lower than its industry average of 3.65%. 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
Sleep Number Corporation has grown its earnings per share (EPS) by 46.19% 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
Sleep Number Corporation has grown its gross margin by 3.97% 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
Sleep Number Corporation 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 Sleep Number 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.
