Today is Monday, May 6, 2019 and here’s your daily small cap valuation.
Virtusa Corporation (NASDAQ: VRTU) 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.
Editor’s Note: We’ve been keeping an eye on a set of small-cap stocks that are a better value than Virtusa 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.
To get a sense of Virtusa 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
Virtusa Corporation’s price-to-book value (P/B) ratio of 4.283 is 3.81% higher than its industry average of 4.126. 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)
Virtusa Corporation’s free cash flow yield (FCF/EV) of 2.83% is 47.10% lower than its industry average of 5.35%. 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
Virtusa Corporation has grown its earnings per share (EPS) by 5.56% 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
Virtusa Corporation has not grown its gross margin in the last year. That’s not good. It indicates that the company is making less money from its operations over time.
Virtusa Corporation scored favorably on 1 of our 4 valuation metrics. With this in mind, we believe the stock is slightly overvalued.
Got another small-cap stock you want us to test with our valuation metrics? Leave the ticker symbol in the comments below.