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Xero

ASX:XRO
Snowflake Description

Exceptional growth potential with flawless balance sheet.

The Snowflake is generated from 30 checks in 5 different areas, read more below.
XRO
ASX
NZ$5B
Market Cap
  1. Software
Company description

Xero Limited, together with its subsidiaries, provides platform for online accounting and business services to small businesses and their advisors worldwide. More info.


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  • Xero's last earnings update was 203 days ago.
SHARE PRICE
3 Month History
XRO
Industry
5yr Volatility vs Market

Value

 Is Xero undervalued based on future cash flows and its price relative to the stock market?

Value is all about what a company is worth versus what price it is available for. If you went into a grocery store and all the bananas were on sale at half price, they could be considered undervalued.
INTRINSIC VALUE BASED ON FUTURE CASH FLOWS
Here we compare the current share price of Xero to its discounted cash flow analysis.value.

The discounted cash flow value is simply looking at what the company is worth today, based on estimates of how much money it is expected to make in the future.

How is this discounted cash flow calculated?

  • The current share price of Xero is above its future cash flow value.
Often investors are willing to pay a premium for a company that has a high dividend or the potential for future growth.
PRICE RELATIVE TO MARKET
We can also value a company based on what the stock market is willing to pay for it. This is similar to the price of fruit (e.g. Mangoes or Avocados) increasing when they are out of season, or how much your home is worth.

The amount the stock market is willing to pay for Xero's earnings, growth and assets is considered below, and whether this is a fair price.
Price based on past earnings
Are Xero's earnings available for a low price, and how does this compare to other companies in the same industry?
  • Xero is loss making, we can't compare it's value to the AU Software industry average.
  • Xero is loss making, we can't compare the value of its earnings to the AU market.
Price based on expected Growth
Does Xero's expected growth come at a high price?
  • Xero is loss making, we can't assess if it's growth is good value.
Price based on value of assets
What value do investors place on Xero's assets?
  • Xero is overvalued based on assets compared to the AU Software industry average.
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Value checks
We assess Xero's value by looking at:
  1. Is the discounted cash flow value less than 20%, or 40% of the share price? (2 checks) ( Click here or on bar chart for details of DCF calculation. )
  2. Is the PE ratio less than the market average, and/ or less than the Software industry average (and greater than 0)? (2 checks)
  3. Is the PEG ratio within a reasonable range (0 to 1)? (1 check)
  4. Is the PB ratio less than the Software industry average (and greater than 0)? (1 check)
  5. Xero has a total score of 0/6, see the detailed checks below.

    Note: We use GAAP Earnings per Share in all our calculations including PE and PEG Ratio.
    Note 2: PEG ratio is based on analysts EPS growth expectations in 1 year (57.9%).

    Full details on the Value part of the Simply Wall St company analysis model.
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Discounted cash flow (2 Stage Free Cash Flow to Equity)

The calculations below outline how an intrinsic value for Xero is arrived at by discounting future cash flows to their present value. We use analyst's estimates of cash flows going forward 5 years.

See our documentation to learn about this calculation.

5 year cash flow forecast

Present value of next 5 years cash flows:
NZ$6

Terminal Value

Terminal Value = FCF2021 × (1 + g) ÷ (Discount Rate – g)

Terminal Value = NZ$71 × (1 + 2.76%) ÷ (9.5% – 2.76%)

Terminal value based on the Perpetuity Method where growth (g) = 2.76%:
NZ$1,087

Present value of terminal value:
NZ$691

Equity Value

Equity Value (Total value) = Present value of next 5 years cash flows + terminal value
NZ$696 = NZ$6 + NZ$691

Value = Total value / Shares Outstanding (NZ$696 / 135)

Discount to Share Price

Value per share (NZD): NZ$5.14

Exchange rate NZD/AUD = 0.892

Value per share (AUD): A$4.59

Current discount (share price of A$30.46): -564.31%



Estimate of Discount Rate

The discount rate, or required rate of return, is estimated by calculating the Cost of Equity.

Discount rate = Cost of Equity = Risk Free Rate + (Levered Beta * Equity Risk Premium)

Discount rate = 9.5% = 2.76% + (0.931 * 7.24%)



Estimate of Bottom Up Beta

The Levered Beta is the Unlevered Beta adjusted for financial leverage. It is limited to 0.8 to 2.0 (practical range for a stable firm). Note the market value of equity is used not the book value (NZ$4,626,027,779).

Levered Beta = Unlevered beta (1 + (1- tax rate) (Debt/Equity))

0.931 = 0.931 (1 + (1- 30%) (0%))

Levered Beta used in calculation = 0.931



Equivalent number of shares

If the companies market cap is in a different currency to that of the listing the equivalent number of shares outstanding must be calculated.

Market Cap (NZD): NZ$4,626,027,779

Exchange rate NZD/AUD = 1.121

Market Cap (AUD): A$4,124,880,186

Equivalent shares outstanding: A$4,124,880,186 / A$30.460000 = A$135



Assumptions
  1. The risk free rate of 2.76% is from the 10 year government bond rate in AUD.
  2. The bottom-up beta is estimated by analysing other companies in the same industry.
  3. The Equity Risk Premium is calculated by subtracting the risk free rate from the market return premium (7.24%) (source: Buffet).
  4. The dividend discount model is automatically used for companies in the following industries: Banks, Insurance, Real Estate Investment Trusts (REITs), Diversified Financial Services and Capital Markets.

Future Performance

 How is Xero expected to perform in the next 1 to 3 years based on estimates from 8 analysts?

The future performance of a company is measured in the same way as past performance, by looking at estimated growth and how much profit it is expected to make.

Future estimates come from professional analysts. Just like forecasting the weather, they don’t always get it right!
Annual Growth Rate
59.7%
Expected annual growth in earnings.
Earnings growth vs Low Risk Savings
Is Xero expected to grow at an attractive rate?
  • Xero's earnings growth is expected to exceed the low risk savings rate of 4.1%.
Growth vs Market Checks
  • Xero's earnings growth is expected to exceed the AU market average.
  • Xero's revenue growth is expected to exceed the AU market average.
Annual Growth Rates Comparison
Analysts growth expectations
Super high growth metrics
High Growth Checks
  • Xero's earnings are expected to grow significantly at over 20% yearly.
  • Xero's revenue is expected to grow significantly at over 20% yearly.
Past and Future Earnings per Share
The accuracy of the analysts who estimate the future performance data can be gauged below. We look back 3 years and see if they were any good at predicting what actually occurred. We also show the highest and lowest estimates looking forward to see if there is a wide range.
Performance in 3 years
In the same way as past performance we look at the future estimated return (profit) compared to the available funds. We do this looking forward 3 years.
  • Xero is expected to perform strongly, Return on Equity (ROE) in 3 years is estimated to be above 20%.

Improvement & Relative to industry
  • Performance (ROE) is expected to be above the current AU Software industry average.
  • An improvement in Xero's performance (ROE) is expected over the next 3 years.
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Future performance checks
We assess Xero's future performance by looking at:
  1. Is the annual earnings growth rate expected to beat the low risk savings rate, plus a premium to keep pace with inflation?
  2. Is the annual earnings growth rate expected to beat the average growth rate in earnings of the AU market? (1 check)
  3. Is the annual revenue growth rate expected to beat the average growth rate in revenue of the AU market? (1 check)
  4. Is the annual earnings growth rate expected to be above 20%? (1 check)
  5. Is the annual revenue growth rate expected to be above 20%? (1 check)
  6. Is the Return on Equity in 3 years expected to be over 20%? (1 check)
Some of the above checks will fail if the company is expected to be loss making in the relevant year.
Xero has a total score of 6/6, see the detailed checks below.

Note 1: We use GAAP Net Income Excluding Exceptional Items for our Earnings in all our calculations.

Full details on the Future part of the Simply Wall St company analysis model.

Past Performance

  How has Xero performed over the past 5 years?

  • Xero's last earnings update was 203 days ago.
The past performance of a company can be measured by how much growth it has experienced and how much profit it makes relative to the funds and assets it has available.
Past earnings growth
Below we compare Xero's growth in the last year to its industry (Software).
Past Earnings growth analysis
We also check if the company has grown in the past 5 years, and whether it has maintained that growth in the year.
  • Xero does not currently make a profit.
Earnings and Revenue History
Xero's revenue and profit over the past 5 years is shown below, any years where they have experienced a loss will show up in red.
Performance last year
We want to ensure a company is making the most of what it has available. This is done by comparing the return (profit) to a company's available funds, assets and capital.
  • Xero has negative negative earnings from operations, therefore its ROE is meaningless.
  • Xero had negative or no Return on Assets (ROA) last year.
  • Return based on revenue producing assets (ROCE) is negative or zero.
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Past performance checks
We assess Xero's performance over the past 5 years by checking for:
  1. Has earnings increased in past 5 years? (1 check)
  2. Has the earnings growth in the last year exceeded that of the Software industry? (1 check)
  3. Is the recent earnings growth over the last year higher than the average annual growth over the past 5 years? (1 check)
  4. Is the Return on Equity (ROE) higher than 20%? (1 check)
  5. Is the Return on Assets (ROA) above industry average? (1 check)
  6. Has the Return on Capital Employed (ROCE) increased from 3 years ago? (1 check)
The above checks will fail if the company has reported a loss in the most recent earnings report. Some checks require at least 3 or 5 years worth of data.
Xero has a total score of 0/6, see the detailed checks below.

Note: We use GAAP Net Income excluding extraordinary items in all our calculations.

Full details on the Past part of the Simply Wall St company analysis model.

Health

 How is Xero's financial health and their level of debt?

A company's financial position is much like your own financial position, it includes everything you own (assets) and owe (liabilities).

The boxes below represent the relative size of what makes up Xero's finances.

The net worth of a company is the difference between its assets and liabilities.
Net Worth
  • Xero is able to meet its short term (1 year) commitments with its holdings of cash and other short term assets.
  • Xero's cash and other short term assets cover its long term commitments.
Balance sheet
This treemap shows a more detailed breakdown of Xero's finances. If any of them are yellow this indicates they may be out of proportion and red means they relate to one of the checks below.
Assets
Liabilities and shares
The 'shares' portion represents any funds contributed by the owners (shareholders) and any profits.
  • Low level of unsold assets.
  • Xero has no debt.
Historical Debt
Nearly all companies have debt. Debt in itself isn’t bad, however if the debt is too high, or the company can’t afford to pay the interest on its debts this may have impacts in the future.

The graphic below shows equity (available funds) and debt, we ideally want to see the red area (debt) decreasing.

If there is any debt we look at the companies capability to repay it, and whether the level has increased over the past 5 years.
  • Xero has no debt.
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Financial health checks
We assess Xero's financial health by checking for:
  1. Are short term assets greater than short term liabilities? (1 check)
  2. Are short term assets greater than long term liabilities? (1 check)
  3. Has the debt to equity ratio increased in the past 5 years? (1 check)
  4. Is the debt to equity ratio over 40%? (1 check)
  5. Is the debt covered by short term assets? (1 check)
  6. Are earnings greater than 5x the interest on debt (if company pays interest at all)? (1 check)
  7. Xero has a total score of 6/6, see the detailed checks below.


Full details on the Health part of the Simply Wall St company analysis model.

Dividends

 What is Xero's current dividend yield, its reliability and sustainability?

Dividends are regular cash payments to you from the company, similar to a bank paying you interest on a savings account.
Annual Dividend Income
Dividend payments
0%
Current annual income from Xero dividends. Estimated to be 0.02% next year.
If you bought A$2,000 of Xero shares you are expected to receive A$0 in your first year as a dividend.
Dividend Amount
Here we look how much dividend is being paid, if any. Is it above what you can get in a savings account? It is up there with the best dividend paying companies?
  • Not paying a dividend.
  • Not paying a dividend.
Historical and Future Dividends
It is important to see if the dividend for a company is stable, and not wildly increasing/decreasing each year. This graph shows you the historical rate to count toward your assessment of the stock.

We also check to see if the dividend has increased in the past 10 years.
  • Not paying a notable dividend.
  • Not paying a notable dividend.
Current Payout to shareholders
What portion of Xero's earnings are paid to the shareholders as a dividend.
  • Not paying a notable dividend.
Future Payout to shareholders
  • Insufficient estimate data to determine if a dividend will be paid in 3 years.
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Income/ dividend checks
We assess Xero's dividend by checking for:
  1. Firstly is the company paying a notable dividend (greater than 0.5%) - if not then the rest of the checks are ignored.
  2. Current dividend yield, is there one at all, is it higher than the low risk savings rate, and is it above the top 25% of dividend payers? (2 checks)
  3. Have they paid a dividend for 10 years, and during this period has the dividend been volatile (drop of more than 25%)? (1 check)
  4. If they have paid a dividend for 10 years has it increased in this time? (1 check)
  5. How sustainable is the dividend, can Xero afford to pay it from its earnings today and in 3 years (Payout ratio less than 90%)? (2 checks)
  6. Xero has a total score of 0/6, see the detailed checks below.


Full details on the Dividends part of the Simply Wall St company analysis model.

Management

 What is the CEO of Xero's salary, the management and board of directors tenure and is there insider trading?

Management is one of the most important areas of a company. We look at unreasonable CEO compensation, how long the team and board of directors have been around for and insider trading.
CEO
Rod Drury, image provided by Google.
Rod Drury
COMPENSATION NZ$731,000
CEO Bio

Mr. Rod Drury, BCA, HFNZCS is a Co-Founder of Xero Limited and serves as its Chief Executive Officer and Executive Director. Mr. Drury Co-Founded Context Connect, LLC in 2000 and served as its Chief Technology Officer. Mr. Drury served as Chief Executive Officer of Aftermail Limited. He serves as Chairman of PlanHQ Ltd. Mr. Drury serves as an Independent Director of Xero Live Limited (UK), Xero Live Pty Limited (Australia) and Xero Trustee Limited. He serves as a Director of Pacific Fibre Limited. He serves as a Member of Technical Advisory Board at 2 Ignite Fund. He served as an Independent Director at NZX Limited from November 18, 2009 to May 3, 2013. He served as a Director of Context Connect, LLC. Mr. Drury is the winner of NZX Entrepreneur of the Year Award. He holds a Bachelor of Commerce and Administration (BCA) from Victoria University, majoring in Accounting.

CEO Compensation
  • Rod's compensation has been consistent with company performance over the past year.
  • Rod's compensation appears reasonable.
Management Team Tenure

Average tenure of the Xero management team in years:

2.5
Average Tenure
  • The tenure for the Xero management team is about average.
Management Team

Rod Drury

TITLE
Co-Founder
COMPENSATION
NZ$731K

Sankar Narayan

TITLE
Chief Operating and Financial Officer
TENURE
0.7 yrs

Kirsty Godfrey-Billy

TITLE
Chief Accounting Officer
TENURE
2.8 yrs

Chaman Sidhu

TITLE
General Counsel and Company Secretary
TENURE
1 yrs

Alex Mercer

TITLE
Head of Global Communications

Rachael Powell

TITLE
Chief People Officer
TENURE
2.8 yrs

Gary Turner

TITLE
Managing Director of United Kingdom
TENURE
8.3 yrs

Anne Allen

TITLE
Head of People Experience - UK
TENURE
3.9 yrs

Tony Stewart

TITLE
Chief Product
TENURE
0.3 yrs

Anna Curzon

TITLE
Chief Partner Officer
TENURE
0.7 yrs
Board of Directors Tenure

Average tenure of the Xero board of directors in years:

3.4
Average Tenure
  • The tenure for the Xero board of directors is about average.
Board of Directors

Graham Smith

TITLE
Chairman of the Board
COMPENSATION
NZ$220K
AGE
57
TENURE
0.8 yrs

Rod Drury

TITLE
Co-Founder
COMPENSATION
NZ$731K

Bill Veghte

TITLE
Non-Executive Director
COMPENSATION
NZ$185K
AGE
50
TENURE
3.7 yrs

Lee Hatton

TITLE
Non-Executive Director
COMPENSATION
NZ$81K
TENURE
3.5 yrs

Andrew Winkler

TITLE
Non-Executive Director
COMPENSATION
NZ$57K
TENURE
8.4 yrs

Susan Peterson

TITLE
Non-Executive Director
COMPENSATION
NZ$9K
TENURE
0.7 yrs
Recent Insider Trading
  • More shares have been bought than sold by Xero insiders in the past 3 months, but not in substantial volumes.
Who owns this company?
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Management checks
We assess Xero's management by checking for:
  1. Is the CEO's compensation unreasonable compared to market cap and profit (greater than 0.5% of the company's profit + 0.03% of market cap)? (1 check)
  2. Has the CEO's compensation increased more than 20% whilst the EPS is down more then 20%? (1 check)
  3. Is the average tenure of the management team less than 2 years? (1 check)
  4. Is the average tenure of the board of directors team less than 3 years? (1 check)
  5. Xero has a total score of 0/6, this is not included on the snowflake, see the detailed checks below.


Note: We use the top 6 management executives and board members in our calculations.

Note 2: Insider trading include any internal stakeholders and these transactions .

Full details on the Management part of the Simply Wall St company analysis model.

Company News

Company Info

Map
Description

Xero Limited, together with its subsidiaries, provides platform for online accounting and business services to small businesses and their advisors worldwide. It offers Xero, an online or cloud-based accounting software that automates various manual processes. The company offers accountant/bookkeeper tools, such as Xero HQ, Xero Practice Manager, Xero Workpapers, and Xero Cashbook/Ledger; and Xero mobile app. It serves various businesses, such as retail, high tech, non-profit, legal, hospitality, cafés, startups, construction, creatives, e-commerce, and small business. Xero Limited was founded in 2006 and is headquartered in Wellington, New Zealand.

Details
Name: Xero Limited
Ticker: XRO
Exchange: ASX
Founded: 2006
Market Cap: NZ$4,124,880,186
Shares outstanding: 137,270,854
Website: www.xero.com
Address: Xero Limited
XERO ONE,
19-23 Taranaki Street,
Wellington,
6011,
New Zealand
Listings
Exchange Symbol Ticker Symbol Security Exchange Country Currency Listed on
NZSE XRO Ordinary Shares New Zealand Stock Exchange NZ NZD 05. Jun 2007
OTCPK XROL.F Ordinary Shares Pink Sheets LLC US USD 05. Jun 2007
DB 0XE Ordinary Shares Deutsche Boerse AG DE EUR 05. Jun 2007
ASX XRO Ordinary Shares Australian Securities Exchange AU AUD 05. Jun 2007
CHIA XRO Ordinary Shares Chi-X Australia AU AUD 05. Jun 2007
Number of employees
Current staff
Staff numbers
1,721
Xero employees.
Industry
Industry: Application Software
Sector: Software and Services