No Stopping The Gooch & Housego PLC (LON:GHH) Growth Train

Gooch & Housego PLC (AIM:GHH)'s outlook is one of buoyant sentiment as it continues to post exciting top-line revenue growth. I will conduct a high level fundamental analysis on the company by looking at its past financials and growth prospects moving forward.

Firstly, a quick intro on the company - Gooch & Housego PLC researches, designs, engineers, manufactures, and sells photonic systems, components, and instrumentation in the United States, continental Europe, the United Kingdom, the Asia Pacific, and internationally. Started in 1948, it operates in United Kingdom and is recently valued at UK£334.02M.

The company is growing incredibly fast, with a year-on-year revenue growth of 30.17% over the past financial year , and a net income growth of 26.16%. In the last five years, sales has grown 9.73%, lifted by previous years of higher capital expenditure, which most recently reached UK£5.80M. With continual reinvestment into business operations, a return on investment of 11.10% is forecasted for the upcoming three years, according to the consensus of broker analysts covering the stock. Net income is expected to reach UK£12.30M in the upcoming year, and over the next five years, earnings are expected to rise at an annual rate of 12.96% on average, compared to the industry average growth of 7.74%. These figures illustrate GHH's strong track record of producing profit to its investors, with an efficient approach to reinvesting into the business, and a buoyant future compared to peers in the sector.

Minimizing the downside is arguably more important than maximizing the upside. Generally the first check to meet is financial health - a strong indicator of an investment's risk. Gooch & Housego's balance sheet is healthy, with high levels of cash generated from its core operating activities (1.53x debt) able to service its borrowings. Furthermore, GHH's debt level is at an appropriate 11.72% of equity and has been declining over the past five years from 20.74%. GHH also generates a sufficient level of earnings which amply covers its annual interest payment 19.64x. The company shows the ability to manage its capital requirements well, reducing my concerns around the sustainability of the business going forward. GHH has high near term liquidity, with short term assets (cash and other liquid assets) amply covering upcoming one-year liabilities, as well as long-term commitments. GHH has managed its cash well at a current level of UK£26.43M. However, more than a fifth of its total assets are physical assets and inventory, which means that in the worst case scenario, such as a downturn or bankruptcy, a significant portion of assets will be hard to liquidate and redistribute back to investors.

GHH is now trading at UK£13.50 per share. With 24.74 million shares, that's a UK£334.02M market cap - which is too high for a company that has a 5-year cumulative average growth rate (CAGR) of 12.01% (source: analyst consensus). With an upcoming 2018 free cash flow figure of UK£9.95M, the target price for GHH is UK£9.30. This indicates that the stock is currently priced at a large premium. Also, comparing GHH's current share price to its peers based on its industry and earnings level, it's overvalued by 96.31%, with a PE ratio of 37.13x vs. the industry average of 18.92x.

GHH's investment thesis is a positive one. I'm attracted to the company because of its strong fundamentals - financial health, future outlook and track record. However, at its current share price, right now may not be the best time to invest. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I've taken my data from.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.