The stock of Cumberland Pharmaceuticals (NAS:CPIX, 30-year Financials) is estimated to be possible value trap, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $3.03 per share and the market cap of $45.2 million, Cumberland Pharmaceuticals stock gives every indication of being possible value trap. GF Value for Cumberland Pharmaceuticals is shown in the chart below.
The reason we think that Cumberland Pharmaceuticals stock might be a value trap is because Cumberland Pharmaceuticals has an Altman Z-score of 1.04, which indicates that the financial condition of the company is in the distressed zone and implies a higher risk of bankruptcy. An Altman Z-score of above 2.99 would be better, indicating safe financial conditions. To learn more about how the Z-score measures the financial risk of the company, please go here.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Cumberland Pharmaceuticals has a cash-to-debt ratio of 1.29, which ranks in the middle range of the companies in Drug Manufacturers industry. Based on this, GuruFocus ranks Cumberland Pharmaceuticals's financial strength as 5 out of 10, suggesting fair balance sheet. This is the debt and cash of Cumberland Pharmaceuticals over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Cumberland Pharmaceuticals has been profitable 4 years over the past 10 years. During the past 12 months, the company had revenues of $37.4 million and loss of $0.22 a share. Its operating margin of -17.05% worse than 70% of the companies in Drug Manufacturers industry. Overall, GuruFocus ranks Cumberland Pharmaceuticals's profitability as poor. This is the revenue and net income of Cumberland Pharmaceuticals over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Cumberland Pharmaceuticals is -1.5%, which ranks worse than 73% of the companies in Drug Manufacturers industry. The 3-year average EBITDA growth rate is -13.2%, which ranks worse than 76% of the companies in Drug Manufacturers industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Cumberland Pharmaceuticals's ROIC was -10.46, while its WACC came in at 2.90. The historical ROIC vs WACC comparison of Cumberland Pharmaceuticals is shown below:
In short, the stock of Cumberland Pharmaceuticals (NAS:CPIX, 30-year Financials) shows every sign of being possible value trap. The company's financial condition is fair and its profitability is poor. Its growth ranks worse than 76% of the companies in Drug Manufacturers industry. To learn more about Cumberland Pharmaceuticals stock, you can check out its 30-year Financials here.
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