Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is H World Group Ltd (HTHT, Financial). The stock, which is currently priced at 35.96, recorded a loss of 5.04% in a day and a 3-month decrease of 7.1%. The stock's fair valuation is $54.82, as indicated by its GF Value.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors: historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.
Investors need to consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with H World Group should not be ignored. These risks are primarily reflected through its low Altman Z-score of 1.38, suggesting that H World Group, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Altman Z-Score: A Key Financial Indicator
Invented by New York University Professor Edward I. Altman in 1968, the Altman Z-score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
Introduction to H World Group
H World Group Ltd is a multi-brand hotel group in China with international operations. It operates in the leased, manachised, and franchised models. The company has two operating segments; legacy Huazhu and legacy DH. Its brand and product offering includes Economy hotel brands: HanTing Hotel, Ni Hao Hotel, Hi Inn, Elan Hotel, Zleep Hotels, and Ibis Hotel, Midscale hotel brands: JI Hotel, Orange Hotel, Starway Hotel and Ibis Styles Hotel, Upper midscale hotel brands: Crystal Orange Hotel, IntercityHotel, Manxin Hotel, Mercure Hotel, Madison Hotel, Novotel Hotel, CitiGO Hotel and MAXX by Steigenberger, Upscale hotel brands: Joya Hotel, Blossom House, Steigenberger Hotels & Resorts, Jaz in the City, and Grand Mercure; and Luxury hotel brand: Steigenberger Icon and Song Hotels.
Dissecting H World Group's Financial Health
A dissection of H World Group's Altman Z-score reveals H World Group's financial health may be weak, suggesting possible financial distress:
The Retained Earnings to Total Assets ratio provides insights into a company's capability to reinvest its profits or manage debt. Evaluating H World Group's historical data, 2021: 0.03; 2022: -0.01; 2023: 0.01, we observe a declining trend in this ratio. This downward movement indicates H World Group's diminishing ability to reinvest in its business or effectively manage its debt. Consequently, it exerts a negative impact on its Z-Score.
The EBIT to Total Assets ratio serves as a crucial barometer of a company's operational effectiveness, correlating earnings before interest and taxes (EBIT) to total assets. An analysis of H World Group's EBIT to Total Assets ratio from historical data (2021: 0.02; 2022: -0.03; 2023: 0.05) indicates a recent dip following an initial rise. This reduction suggests that H World Group might not be utilizing its assets to their full potential to generate operational profits, which could be negatively affecting the company's overall Z-score.
Conclusion: A Potential Value Trap?
Given the financial indicators and the potential risks associated with H World Group, it appears that the company might be a potential value trap. Therefore, investors should exercise caution and conduct thorough due diligence before making an investment decision.
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This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
