– By GF Value

The stock of Drive Shack (NYSE:DS, 30-year Financials) shows every sign 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 $3.21 per share and the market cap of $293 million, Drive Shack stock appears to be fairly valued. GF Value for Drive Shack is shown in the chart below.

Drive Shack Stock Gives Every Indication Of Being Fairly Valued

Drive Shack Stock Gives Every Indication Of Being Fairly Valued

Because Drive Shack is fairly valued, the long-term return of its stock is likely to be close to the rate of its business growth.

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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Drive Shack has a cash-to-debt ratio of 0.20, which is worse than 67% of the companies in Travel & Leisure industry. The overall financial strength of Drive Shack is 1 out of 10, which indicates that the financial strength of Drive Shack is poor. This is the debt and cash of Drive Shack over the past years:

Drive Shack Stock Gives Every Indication Of Being Fairly Valued

Drive Shack Stock Gives Every Indication Of Being Fairly Valued

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. Drive Shack has been profitable 6 over the past 10 years. Over the past twelve months, the company had a revenue of $220 million and loss of $0.92 a share. Its operating margin is -16.98%, which ranks in the middle range of the companies in Travel & Leisure industry. Overall, the profitability of Drive Shack is ranked 3 out of 10, which indicates poor profitability. This is the revenue and net income of Drive Shack over the past years:

Drive Shack Stock Gives Every Indication Of Being Fairly Valued

Drive Shack Stock Gives Every Indication Of Being Fairly Valued

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. Drive Shack’s 3-year average revenue growth rate is worse than 72% of the companies in Travel & Leisure industry%. Drive Shack’s 3-year average EBITDA growth rate is 0%, which ranks in the bottom 10% of the companies in Travel & Leisure industry.

Another way to evaluate a company’s profitability is to compare its return on invested capital (ROIC) to its weighted 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 is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Drive Shack’s ROIC was -8.05, while its WACC came in at 7.23. The historical ROIC vs WACC comparison of Drive Shack is shown below:

Drive Shack Stock Gives Every Indication Of Being Fairly Valued

Drive Shack Stock Gives Every Indication Of Being Fairly Valued

To conclude, the stock of Drive Shack (NYSE:DS, 30-year Financials)is estimated to be fairly valued. The company’s financial condition is poor and its profitability is poor. Its growth ranks in the bottom 10% of the companies in Travel & Leisure industry. To learn more about Drive Shack stock, you can check out its 30-year Financials here. To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener. This article first appeared on GuruFocus.