|Name of Company||Country of Origin/ Exchange Traded||Sector||Stock Price|
|ROLLS-ROYCE HOLDINGS PLC||UK/
|Industrials – Aerospace & Defense – Aerospace & Defense||GBP9.92|
|@ 23 Sep 2018|
|COMPANY PROFILE||Rolls-Royce Holdings PLC is a pre-eminent engineering company. The group is organised into five customer-facing businesses: Civil Aerospace, Defence Aerospace, Power Systems, Marine and Nuclear.
Rolls-Royce is one of the world’s leading suppliers of gas turbines and reciprocating engines and services to the aerospace, marine, and industrial power system markets. In 2016, the firm generated GBP 13.7 billion in revenue. About 67% of revenue comes from civil and defence aerospace equipment sales and services. The land and sea division, which features Rolls-Royce’s marine, nuclear, and powers system businesses, generates the remaining 33% of sales.
|Stock Valuation Below|
|Price to Cash Flow is an alternative method to value shares. This is because accounting profits can be subject to manipulation. Therefore, some investors prefer to value a company based on cash flows generated by the operating activities of the company. It also acts as a reality check to valuation measures such as Price to Earnings and Price to Sales. If a company generates high profits and sales but not operating cash flows, it could be heading for trouble because it is cash that pays the operating expenses. However, the Price to Cash Flow ratio of most firms are volatile and should not be used in isolation to determine the valuation of the stock.|
|At the price of GBP9.92 as at 23 Sep 2018, Rolls-Royce Holdings Plc is trading at a Price to Cash Flow Ratio of 10.7 times last 12 months cash flow. This is a 3.5% premium to current fair Price to Cash Flow Ratio of 10.3 times.|
|Is the stock overvalued? One should not just look at one indicator to determine the fair value of a stock.|
|ProThinker believes in using a combination of valuation methods to decide whether a stock is over or undervalued? The five ratios we use are Price to Earnings, Price to Sales, Price to Cash Flow, Price to Book and Dividend Yield. We use multiple methods to value a stock because each has its benefits as well as shortcomings. Price to Earnings and Price to Cash Flow Ratios relate stock price to profitability but are meaningless when the comany has negative earnings or cash flows. Price to Sales Ratio is more stable because sales are never negative. However, this does not tell us whether the company is able to sell profitably. Price to Book Ratio gives us an indication as to how much we are paying for the company’s assets but it is not directly related to the company’s profitability. Dividend Yield cannot be used for companies that are paying little to no dividends.|
|While it is important to value stocks based on multiple valuation methods, this often leads to differing views on valuation. One indicator may suggest that a stock is overvalued while another suggest that it is undervalued. This does not help an investor who needs to make a definite decision whether to buy, hold or sell the stock. That is why we advocate the use of a Composite Valuation Indicator, which is derived from the best combination of the five indicators above. A Composite Valuation Indicator will give you ONE conclusion on whether a stock is under or over valued.|
|To find out more about our valuation methodology, click here.|
|Source of Data: Company description, historical financial statements data and price data are from gurufocus.com or moneycontrol.com. Estimates are from marketscreener.com – Thomson Reuters.|
|Disclaimer: This report is for information purposes only and should not be considered a solicitation to buy or sell any security. Neither ProThinker nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Redistribution is prohibited without the express written consent of ProThinker. Copyright(c) 2018. All rights reserved.|