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Xero

ASX:XRO
Snowflake Description

Flawless balance sheet with high growth potential.

The Snowflake is generated from 30 checks in 5 different areas, read more below.
XRO
ASX
$3B
Market Cap
Application Software
Company description

Xero Limited, together with its subsidiaries, provides platform for online accounting and business services to small businesses and their advisors in New Zealand, Australia, the United Kingdom, North America, and internationally. More info.


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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 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 Avacados) 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?
  • No earnings or negative earnings.
  • No earnings or negative earnings.
Price based on expected Growth
Does Xero's expected growth come at a high price?
  • No earnings or negative earnings.
Price based on value of assets
What value do investors place on Xero's assets?
  • Overvalued based on assets compared to the Software industry average.
X
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 (56.95%).

    Full details on the Value part of the Simply Wall St company analysis model.
X
Discounted cash flow (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:
$-6

Terminal Value

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

Terminal Value = $61 × (1 + 2.6%) ÷ (8.84% – 2.6%)

Terminal value based on the Perpetuity Method where growth (g) = 2.6%:
$1,010

Present value of terminal value:
$661

Equity Value

Equity Value (Total value) = Present value of next 5 years cash flows + terminal value

Value = Total value / Shares Outstanding ($655 / 137)

Value per share (NZD): $4.78

Exchange rate NZD/AUD = 0.947

Value per share (AUD): $4.53

Current discount (share price of $23.03): -408%



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 = 8.84% = 2.6% + (0.844 * 7.4%)



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).

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

0.844 = 0.844 (1 + (1- 30%) (0%))

Levered Beta used in calculation = 0.844



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): 3,329

Exchange rate NZD/AUD = 0.947

Market Cap (AUD): $3,154

Equivalent shares outstanding: $3,154 / $23.03 = 137



Assumptions
  1. The risk free rate of 2.6% is from the 10 year government bond rate in AU.
  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 (10%) (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 7 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!
    3 year growth
    Earnings are expected to become positive over 3 years.
    Future Earnings growth analysis
    Is Xero expected to grow at an attractive rate? We look at the 1 year and 3 year growth below.

    Are Xero's annual earnings growth expected to exceed 3.9% over the next 3 years?

    • Loss making next year.
    • Expected to become positive over 3 years.
    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 occured. We also show the highest and lowest estimates looking forward to see if there is a wide range.
    Analysts growth expectations
    2 year growth check
    Super high growth metrics x1.5?

    Which of the these is expected to increase by over 50% in 2 year's time?

    • Revenue
    • Cash flow is expected to become positive in 2 years.
    • Xero is expected to become profitable in 2 years.
    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
    • Expected to be above the Software industry average.
    • An improvement in Xero's performance (ROE) is expected over the next 3 years.
    X
    Future performance checks
    We assess Xero's future performance by looking at:
    1. Is the growth in earnings expected to beat the low risk savings rate, plus a premium to keep pace with inflation, in 1 year and 3 years? (2 checks)
    2. Does the average analyst expect Revenue to increase by 50% or more in 2 years? (1 check)
    3. Does the average analyst expect Operating Cash Flow to increase by 50% or more in 2 years? (1 check)
    4. Does the average analyst expect Net Income (Profit) to increase by 50% or more in 2 years? (1 check)
    5. 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 5/6, see the detailed checks below.

    Note: If no +3 year data is available, +2.5 year data may be used.

    Note 2: We use GAAP per Share 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?

    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.
    Profit 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.
    • Negative return on shareholders funds (ROE) last year.
    • Xero had negative or no return on assets (ROA) last year.
    • Return based on revenue producing assets (ROCE) is negative or zero.
    X
    Past performance checks
    We assess Xero's performance over the past 5 years by checking for:
    1. Has earnings per share (EPS) increased in past 5 years? (1 check)
    2. Has the EPS growth in the last year exceeded that of the Software industry? (1 check)
    3. Is the current EPS growth 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 Earnings per Share 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
    • Company 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.
    X
    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 comapany 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.
    If you bought $2,000 of Xero shares you are expected to receive $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?
    • Paying below low risk savings rate. (3%)
    • Paying below the markets top dividend payers. (4.92%)
    Historical dividend yield
    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.
    X
    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$731,000
    CEO Bio

    Mr. Rod Drury, BCA, HFNZCS is a Co-Founder of Xero Limited and serves as its Chief Executive Officer and Director. Mr. Drury serves as an Independent Director of Xero Live Limited (UK), Xero Live Pty Limited (Australia) and Xero Trustee Limited. He served as an Independent Director at NZX Limited from November 18, 2009 to May 3, 2013. He serves as a Member of Technical Advisory Board at 2 Ignite Fund. Mr. Drury is the winner of NZX Entrepreneur of the Year Award.

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

    Average tenure of the Xero management team:

    Management tenure
    2.2 years
    • The tenure for the Xero management team is about average.
    Management Team

    Rod Drury

    TITLE
    Co-Founder
    COMPENSATION
    $731,000

    Sankar Narayan

    TITLE
    Chief Operating and Financial Officer

    Kirsty Godfrey-Billy

    TITLE
    Chief Accounting Officer

    Chaman Sidhu

    TITLE
    General Counsel and Company Secretary

    Alex Mercer

    TITLE
    Head of Global Communications

    Rachael Powell

    TITLE
    Chief People Officer
    Board of Directors Tenure

    Average tenure of the Xero board of directors:

    Board tenure
    3.5 years
    • The tenure for the Xero board of directors is about average.
    Board of Directors

    Graham Smith

    TITLE
    Chairman of the Board
    COMPENSATION
    $220,000
    AGE
    57

    Rod Drury

    TITLE
    Co-Founder
    COMPENSATION
    $731,000

    Bill Veghte

    TITLE
    Non-Executive Director
    COMPENSATION
    $185,000
    AGE
    50

    Lee Hatton

    TITLE
    Non-Executive Director
    COMPENSATION
    $81,000

    Andrew Winkler

    TITLE
    Non-Executive Director
    COMPENSATION
    $57,000

    Craig Elliott

    TITLE
    Independent Non-Executive Director
    COMPENSATION
    $57,000
    AGE
    56
    Recent Insider Trading
    • Xero insiders have sold more shares than they have bought in the past 3 months.
    Who owns this company?
    X
    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 6/6, 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

    Description

    Xero Limited, together with its subsidiaries, provides platform for online accounting and business services to small businesses and their advisors in New Zealand, Australia, the United Kingdom, North America, and internationally. It offers Xero, an online accounting software, including online accounting, invoicing, bank reconciliation, payroll, mobile, inventory, quotes, expense claims, reporting, and payments. Xero Limited was founded in 2006 and is based in Wellington, New Zealand.

    Details
    Name:Xero Limited
    Ticker:XRO
    Exchange:ASX
    Founded:2006
    Market Cap:$3,329 million
    Website:http://www.xero.com
    Listings
    Map

    3 Market Lane, Wellington, 6011, New Zealand

    Number of employees
    Street

    Current staff
    Staff numbers
    1,721
    Xero employees.
    Industry
    Industry:Application Software
    Sector:Software and Services