The stock of AGL Energy (ASX: AGL, 30-year-old Financials) appears to be significantly undervalued, according to GuruFocus Value’s calculation. The GuruFocus Value is GuruFocus’s estimate of the fair value at which the stock is to trade. It is calculated based on the historical multiples at which the stock has traded, the company’s past growth, and analysts’ estimates of the company’s future performance. If a stock’s price is significantly above the GF value line, it is overvalued and its future performance is likely to be poor. On the other hand, if it is significantly below the GF value line, its future return is likely to be higher. At its current price of AUD 9.14 per share and market cap of AUD 5.8 billion, AGL Energy’s share would be significantly undervalued. The GF value for AGL Energy is shown in the table below.

Given that AGL Energy is significantly undervalued, its long-term stock return is likely to be much higher than its business growth, which has averaged 0.3% over the past five years.

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Companies with poor financial strength present investors with a high risk of permanent capital loss. To avoid a permanent loss of capital, an investor should do his research and consider the financial strength of a company before deciding to buy stocks. Both cash-to-debt ratio and covering a company’s interests are a great way to understand its financial strength. AGL Energy has a cash-to-debt ratio of 0.23, which ranks among the average for companies in the Utilities – Independent Power Producers industry. The overall financial strength of AGL Energy is 4 out of 10, indicating that the financial strength of AGL Energy is weak. Here is AGL Energy’s debt and cash flow over the past few years:

It is less risky to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A business with high profit margins is also generally a safer investment than a business with low profit margins. AGL Energy has been profitable 9 in the past 10 years. In the past twelve months, the company achieved sales of AUD 11.1 billion and a loss of AUD 2.585 per share. His the operating margin is -9.85%, which ranks lower than 83% of companies in the utility industry – independent power producers. Overall, GuruFocus ranks AGL Energy’s profitability as 6 out of 10, indicating acceptable profitability. Here is AGL Energy’s sales and net income over the past few years:

Growth is probably the most important factor in the valuation of a business. GuruFocus research has shown that growth is closely linked to the long-term performance of a company’s stocks. The faster a company grows, the more likely it is to create shareholder value, especially if the growth is profitable. AGL Energy’s 3-year average annual revenue growth rate is 0.3%, which is in line with the average for companies in the Utilities – Independent Power Producers industry. The 3-year average EBITDA growth rate is 18.2%, which ranks better than 77% of companies in the Utilities – Independent Power Producers sector.

A company’s profitability can also be assessed by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) The extent to which a business 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 should pay, on average, to all of its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely to create value for its shareholders. Over the past 12 months, AGL Energy’s ROIC is -6.55 while its WACC stood at 4.04. AGL Energy’s historical ROIC vs WACC comparison is shown below:

In short, the stock of AGL Energy (ASX: AGL, 30 years Financials) appears to be considerably undervalued. The company’s financial situation is bad and its profitability is fair. Its growth ranks better than 77% of companies in the Utilities industry – Independent Power Producers. To find out more about AGL Energy’s share, you can view its 30-year financial data here.

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