The stock of Berkshire Hathaway (NYSE:BRK.B, 30-year Financials) gives every indication of being fairly valued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus’ estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $258.859 per share and the market cap of $596.1 billion, Berkshire Hathaway stock is believed to be fairly valued. GF Value for Berkshire Hathaway is shown in the chart below.
Because Berkshire Hathaway is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 6.9% over the past five years.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company’s financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Berkshire Hathaway has a cash-to-debt ratio of 0.41, which which ranks worse than 83% of the companies in Insurance industry. The overall financial strength of Berkshire Hathaway is 5 out of 10, which indicates that the financial strength of Berkshire Hathaway is fair. This is the debt and cash of Berkshire Hathaway over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Berkshire Hathaway has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $286.3 billion and earnings of $18.109 a share. Its operating margin is 0.00%, which ranks in the bottom 10% of the companies in Insurance industry. Overall, the profitability of Berkshire Hathaway is ranked 6 out of 10, which indicates fair profitability. This is the revenue and net income of Berkshire Hathaway over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Berkshire Hathaway is 6.9%, which ranks in the middle range of the companies in Insurance industry. The 3-year average EBITDA growth is 24.7%, which ranks better than 84% of the companies in Insurance industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Berkshire Hathaway’s return on invested capital is 6.37, and its cost of capital is 6.32. The historical ROIC vs WACC comparison of Berkshire Hathaway is shown below:
In short, Berkshire Hathaway (NYSE:BRK.B, 30-year Financials) stock appears to be fairly valued. The company’s financial condition is fair and its profitability is fair. Its growth ranks better than 84% of the companies in Insurance industry. To learn more about Berkshire Hathaway stock, you can check out its 30-year Financials here.
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