The stock of Origin Agritech (NAS:SEED, 30-year Financials) is believed 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 $9.35 per share and the market cap of $53.3 million, Origin Agritech stock appears to be possible value trap. GF Value for Origin Agritech is shown in the chart below.
The reason we think that Origin Agritech stock might be a value trap is because Origin Agritech has an Altman Z-score of -4.01, 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.
Link: These companies may deliever higher future returns at reduced risk.
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. Origin Agritech has a cash-to-debt ratio of 0.19, which ranks worse than 75% of the companies in Agriculture industry. Based on this, GuruFocus ranks Origin Agritech’s financial strength as 1 out of 10, suggesting poor balance sheet. This is the debt and cash of Origin Agritech 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. Origin Agritech has been profitable 1 over the past 10 years. Over the past twelve months, the company had a revenue of $3 million and loss of $2.579 a share. Its operating margin is -360.17%, which ranks in the bottom 10% of the companies in Agriculture industry. Overall, the profitability of Origin Agritech is ranked 3 out of 10, which indicates poor profitability. This is the revenue and net income of Origin Agritech 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 Origin Agritech is 219.5%, which ranks better than 99% of the companies in Agriculture industry. The 3-year average EBITDA growth rate is 18.4%, which ranks better than 71% of the companies in Agriculture industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. 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. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Origin Agritech’s return on invested capital is -28.06, and its cost of capital is 5.67. The historical ROIC vs WACC comparison of Origin Agritech is shown below:
In conclusion, The stock of Origin Agritech (NAS:SEED, 30-year Financials) appears to be possible value trap. The company's financial condition is poor and its profitability is poor. Its growth ranks better than 71% of the companies in Agriculture industry. To learn more about Origin Agritech stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
