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BHP Group Stock Gives Every Indication Of Being Fairly Valued

- By GF Value

The stock of BHP Group (OTCPK:BHPLF, 30-year Financials) is believed to be 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 $34.81 per share and the market cap of $180.7 billion, BHP Group stock gives every indication of being fairly valued. GF Value for BHP Group is shown in the chart below.


BHP Group Stock Gives Every Indication Of Being Fairly Valued
BHP Group Stock Gives Every Indication Of Being Fairly Valued

Because BHP Group is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth, which averaged 11.5% over the past three years and is estimated to grow 1.00% annually over the next three to five years.

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Link: These companies may deliever higher future returns at reduced risk.

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. BHP Group has a cash-to-debt ratio of 0.42, which which ranks worse than 80% of the companies in Metals & Mining industry. The overall financial strength of BHP Group is 6 out of 10, which indicates that the financial strength of BHP Group is fair. This is the debt and cash of BHP Group over the past years:

BHP Group Stock Gives Every Indication Of Being Fairly Valued
BHP Group Stock Gives Every Indication Of Being Fairly Valued

It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. BHP Group has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $46.3 billion and earnings of $1.375 a share. Its operating margin is 33.20%, which ranks better than 88% of the companies in Metals & Mining industry. Overall, the profitability of BHP Group is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of BHP Group over the past years:

BHP Group Stock Gives Every Indication Of Being Fairly Valued
BHP Group Stock Gives Every Indication Of Being Fairly Valued

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 BHP Group is 11.5%, which ranks better than 74% of the companies in Metals & Mining industry. The 3-year average EBITDA growth is 8.7%, which ranks in the middle range of the companies in Metals & Mining industry.

Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, BHP Group's return on invested capital is 9.70, and its cost of capital is 6.31. The historical ROIC vs WACC comparison of BHP Group is shown below:

BHP Group Stock Gives Every Indication Of Being Fairly Valued
BHP Group Stock Gives Every Indication Of Being Fairly Valued

Overall, the stock of BHP Group (OTCPK:BHPLF, 30-year Financials) shows every sign of being fairly valued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Metals & Mining industry. To learn more about BHP Group stock, you can check out its 30-year Financials here.

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This article first appeared on GuruFocus.