The stock of Cumberland Pharmaceuticals (NAS:CPIX, 30-year Financials) gives every indication of being 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 $2.96 per share and the market cap of $44.5 million, Cumberland Pharmaceuticals stock shows every sign 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 1.14, 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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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Cumberland Pharmaceuticals has a cash-to-debt ratio of 1.48, which is in the middle range of the companies in Drug Manufacturers industry. The overall financial strength of Cumberland Pharmaceuticals is 4 out of 10, which indicates that the financial strength of Cumberland Pharmaceuticals is poor. This is the debt and cash of Cumberland Pharmaceuticals over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Cumberland Pharmaceuticals has been profitable 4 over the past 10 years. Over the past twelve months, the company had a revenue of $39.6 million and loss of $0.14 a share. Its operating margin is -12.26%, which ranks worse than 69% of the companies in Drug Manufacturers industry. Overall, the profitability of Cumberland Pharmaceuticals is ranked 3 out of 10, which indicates poor profitability. 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 stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Cumberland Pharmaceuticals is -1.5%, which ranks worse than 72% of the companies in Drug Manufacturers industry. The 3-year average EBITDA growth rate is -13.2%, which ranks worse than 78% 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 -8.11, while its WACC came in at 2.55. The historical ROIC vs WACC comparison of Cumberland Pharmaceuticals is shown below:
In conclusion, Cumberland Pharmaceuticals (NAS:CPIX, 30-year Financials) stock shows every sign of being possible value trap. The company's financial condition is poor and its profitability is poor. Its growth ranks worse than 78% 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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