Why You Should Look Beyond Evolution Gaming Group AB (publ)'s (STO:EVO) Growth

Evolution Gaming Group AB (publ) (OM:EVO) continues to post impressive revenue growth and its prospects have never been brighter. 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 - Evolution Gaming Group AB (publ) develops, produces, markets, and licenses live casino solutions to sportsbook operators, online gaming operators, and land-based casinos in Europe and Canada. Since starting in 2006 in Sweden, the company has now grown to a market cap of KR16.93B.

The company is growing incredibly fast, with a year-on-year revenue growth of 54.50% over the past financial year , and a net income growth of 95.74%. Over the past five years, sales has increased by 32.88%, lifted by previous years of higher capital expenditure, which most recently reached €10.39M. EVO has been reinvesting more into the business, leading to expected return on investment of 43.83% in the next three years, according to the consensus of broker analysts covering the stock. Net income is expected to grow to €75.35M in the upcoming year, and over the next five years, earnings are predicted to grow at an annual rate of 15.94% on average, compared to the industry average growth of 7.40%. These numbers tell me that EVO has a robust history of delivering profit to shareholders, with a disciplined approach to reinvesting into the company, and a bright future relative to its competitors in the industry.

Limiting your downside risk is an important part of investing, and financial health is a key determinant on whether EVO is a risky investment or not. Evolution Gaming Group's balance sheet is healthy, with high levels of cash generated from its core operating activities (8.18x debt) able to service its borrowings. Furthermore, EVO's debt level is at an appropriate 6.96% of equity, though it has been increasing over the past five years from 0.061%. EVO also generates a sufficient level of earnings which amply covers its annual interest payment 380x. Management exhibits strong capacity to effectively utilize capital, increasing my conviction of the sustainability of the business going forward. EVO 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. A reason I like EVO as a business is its low level of fixed assets on its balance sheet (17.61% of total assets) . When I think about the worst-case scenario in order to assess the downside, such as a downturn or bankruptcy, physical assets and inventory will be hard to liquidate and redistribute back to investors. EVO has virtually no fixed assets, which minimizes its downside risk.

EVO currently trades at KR463.60 per share. At 35.97 million shares, that's a KR16.93B market cap - which is too high, even for a company that has a 5-year cumulative average growth rate (CAGR) of 37.95% (source: analyst consensus). With an upcoming 2018 free cash flow figure of €66.50M, the target price for EVO is €392. Therefore, the stock is trading at a 18.23% premium. Moreover, comparing EVO's current share price to its peers based on its industry and earnings level, it's overvalued by 33.19%, with a PE ratio of 25.78x vs. the industry average of 19.36x.

EVO's investment thesis is a positive one. The stock is appealing 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.