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– By GF Value

The stock of Charter Communications (NAS:CHTR, 30-year Financials) is estimated to be modestly overvalued, 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 $608.58 per share and the market cap of $131 billion, Charter Communications stock is estimated to be modestly overvalued. GF Value for Charter Communications is shown in the chart below.

Charter Communications Stock Shows Every Sign Of Being Modestly Overvalued

Because Charter Communications is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 17.9% over the past three years and is estimated to grow 5.02% annually over the next three to 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. Charter Communications has a cash-to-debt ratio of 0.01, which which ranks in the bottom 10% of the companies in the industry of Media – Diversified. The overall financial strength of Charter Communications is 3 out of 10, which indicates that the financial strength of Charter Communications is poor. This is the debt and cash of Charter Communications over the past years:

Charter Communications Stock Shows Every Sign Of Being Modestly Overvalued

Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Charter Communications has been profitable 5 years over the past 10 years. During the past 12 months, the company had revenues of $48.1 billion and earnings of $15.44 a share. Its operating margin of 17.60% better than 85% of the companies in the industry of Media – Diversified. Overall, GuruFocus ranks Charter Communications’s profitability as fair. This is the revenue and net income of Charter Communications over the past years:

Charter Communications Stock Shows Every Sign Of Being Modestly Overvalued

Growth is probably one of the most important factors in the valuation of a company. GuruFocus’ research has found that growth is closely correlated with the long-term performance of a company’s stock. If a company’s business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company’s revenue and earnings are declining, the value of the company will decrease. Charter Communications’s 3-year average revenue growth rate is better than 86% of the companies in the industry of Media – Diversified. Charter Communications’s 3-year average EBITDA growth rate is 19.8%, which ranks better than 73% of the companies in the industry of Media – Diversified.

One can also evaluate a company’s profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). 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. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Charter Communications’s ROIC is 5.03 while its WACC came in at 6.04. The historical ROIC vs WACC comparison of Charter Communications is shown below:

Charter Communications Stock Shows Every Sign Of Being Modestly Overvalued

In conclusion, Charter Communications (NAS:CHTR, 30-year Financials) stock gives every indication of being modestly overvalued. The company’s financial condition is poor and its profitability is fair. Its growth ranks better than 73% of the companies in the industry of Media – Diversified. To learn more about Charter Communications stock, you can check out its 30-year Financials here.

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This article first appeared on GuruFocus.