Shares of 3D Systems Corporation (DDD) are up 68 percent year to date as of May 23, 2017, following strong first quarter results and renewed optimism that the business is structured more efficiently. That level of appreciation can be common among growth stocks and turnaround stories, but 78 percent gains in five months could indicate a stock with valuation that is growing too rich for some investors.

DDD Revenues

3D Systems experienced rapid growth from 2010 to 2014, but it has struggled to maintain that pace since. The top line rose only 1.85 percent in 2015, and it actually contracted in 2016. That trend reversed in the first quarter of 2017, when revenue grew 3 percent year over year. This renewed strength was attributed to higher demand among industrial, healthcare and materials customers. The slowdown in 2015 and 2016 was caused by an absence of significant new product roll-outs and trimming of low-margin businesses. The company also became less acquisitive in recent years, meaning that all growth must be organic. (See also: 3D Systems Q1 Earnings Lag Estimates, Guidance Stable.)

DDD Gross Margin

Margins have similarly suffered. Gross margin has been somewhat volatile, ranging from 40 percent to 52.1 percent over the past decade. It currently falls comfortably within that range at 49.1 percent over the trailing 12 months. Product life cycle plays a major role in gross margin, and mix has also affected this line as lower-margin product lines were phased out. Gross margin increased 50 basis points in the first quarter of 2017. (See also: 3D Systems Slashes ProX SLS 500 Price to Expand Market Share.)

DDD Margins

Operating margins have suffered more after peaking at 17.1 percent in 2012. While revenue growth slowed, 3D Systems continued experiencing expanding research and development (R&D) as well as selling, general and administrative (SG&A) budgets. The company is still in a growth phase, during which time it is common to overlook short-term profitability in favor of building the infrastructure and product portfolio necessary for future growth. (See also: 3D Systems Diversifies With Prosthetic Devices.)

DDD Profitability

Operating income was negative in 2015 due largely to a $540 million impairment charge. Such non-recurring, non-cash charges often misrepresent the prospects of the ongoing business, but 3D Systems reported significantly negative free cash flow in the same year. This indicated fundamental weakness in the business, not merely a misleading accounting definition. The company incurred a GAAP net loss in the first quarter of 2017, but the losses were less than half of the level sustained a year prior. Adjusted earnings per share increased 20 percent in the quarter.

Peer Group Operating Metrics

3D Systems has reported mixed results for efficiency metrics. The company's asset turnover ratio was 0.72 over the 12-month period that ended in March 2017, which falls in the middle of its trailing-decade range. This is among the highest asset turnover ratios of the peer group, which has an average asset turnover ratio of 0.44, indicating strong performance on the part of 3D Systems in using its asset base to generate sales. Despite that success, 3D Systems currently has an inventory turnover ratio of 2.96 over the trailing 12 months, which is the lowest level achieved since 2008. (See also: What Do Efficiency Ratios Measure?)

DDD Financial Health

The company passes a battery of basic financial health tests. Its equity multiplier is 1.36, which is slightly lower than the decade average and slightly higher than the peer group average. This ratio suggests that the company does not rely heavily on debt to to finance its operations. 3D Systems' current ratio is 2.89, which also falls within its recent historical range. The company's quick ratio is slightly above 2.0. Although these figures trail the peer average, they are high enough to indicate ample liquidity, and the company should not struggle to meet its short-term obligations. (See also: Liquidity Measurement Ratios.)

DDD Valuation Table

Analysis of 3D Systems' valuation reveals mixed results. The stock looks modestly expensive on the basis of price-to-book-value and PEG ratio, which adjusts price-to-earnings for growth forecasts. The company has struggled with profitability in recent years, so its trailing P/E ratio and EV-to-EBITDA​ are less meaningful. The stock has a high forward earnings ratio, indicating some speculation, but it actually compares favorably with its speculative peers. The stock also looks relatively cheap on a cash flow basis. All relative valuation metrics considered, 3D Systems has a risk profile that is inappropriate for many conservative investors, but its valuation is not unambiguously rich. (See also: 3D Systems Stock: Why Not to Buy on Rumors.)

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