Ross Stores Inc (ROST, Financial) has recently seen a daily gain of 2.58% and a three-month gain of 18.74%. Its Earnings Per Share (EPS) stands at 4.72, leading to the question: is the stock fairly valued? This article provides a comprehensive valuation analysis to answer this question. Read on to discover the financial health, profitability, and growth prospects of Ross Stores.
Company Overview
Ross Stores Inc (ROST, Financial) is a leading American off-price apparel and home fashion retailer. It operates over 2,000 stores under the Ross Dress for Less and dd's Discounts banners. Ross Stores focuses on offering name-brand products at prices 20%-70% lower than conventional retailers. Its flexible merchandising approach and low-frills shopping environment centered on a treasure-hunt experience maximize inventory turnover and traffic, enabling its low-price approach.
Understanding GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. The GF Value Line on our summary page provides an overview of the fair value at which the stock should ideally be traded. This value is calculated based on historical trading multiples, a GuruFocus adjustment factor based on the company's past performance and growth, and future business performance estimates.
According to the GF Value, Ross Stores (ROST, Financial) appears to be fairly valued. The stock's fair value is estimated based on historical multiples, an internal adjustment based on the company's past business growth, and analyst estimates of future business performance. If the stock's share price is significantly above the GF Value Line, the stock may be overvalued and have poor future returns. Conversely, if the stock's share price is significantly below the GF Value Line, the stock may be undervalued and have high future returns. Currently priced at $120.83 per share, Ross Stores has a market cap of $41.20 billion and appears to be fairly valued.
Because Ross Stores is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth. For companies that may deliver higher future returns at reduced risk, check out these companies.
Financial Strength
Investing in companies with poor financial strength carries a higher risk of permanent loss of capital. Therefore, it is crucial to review the financial strength of a company before deciding to buy its stock. A good starting point for understanding the financial strength of a company is looking at the cash-to-debt ratio and interest coverage. Ross Stores has a cash-to-debt ratio of 0.79, which is better than 59.45% of 1085 companies in the Retail - Cyclical industry. GuruFocus ranks the overall financial strength of Ross Stores at 7 out of 10, indicating fair financial strength.
Profitability and Growth
Investing in profitable companies, especially those that have demonstrated consistent profitability over the long term, poses less risk. A company with high profit margins is also typically a safer investment than one with low profit margins. Ross Stores has been profitable 10 years over the past decade. Over the past twelve months, the company had a revenue of $19.20 billion and Earnings Per Share (EPS) of $4.72. Its operating margin is 10.52%, which ranks better than 79.14% of 1093 companies in the Retail - Cyclical industry. Overall, GuruFocus ranks the profitability of Ross Stores at 8 out of 10, indicating strong profitability.
Growth is probably one of the most important factors in the valuation of a company. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Conversely, if a company's revenue and earnings are declining, the value of the company will decrease. Ross Stores's 3-year average revenue growth rate is better than 59.54% of 1043 companies in the Retail - Cyclical industry. However, Ross Stores's 3-year average EBITDA growth rate is 0.7%, which ranks worse than 66.59% of 901 companies in the Retail - Cyclical industry.
ROIC vs WACC
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 ROIC exceeds the WACC, the company is likely creating value for its shareholders. During the past 12 months, Ross Stores's ROIC is 21.55 while its WACC came in at 9.85.
Conclusion
Overall, Ross Stores (ROST, Financial) stock appears to be fairly valued. The company's financial condition is fair, and its profitability is strong. However, its growth ranks worse than 66.59% of 901 companies in the Retail - Cyclical industry. To learn more about Ross Stores stock, check out its 30-Year Financials here.
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