The stock of Barrett Business Services (NAS:BBSI, 30-year Financials) appears 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 $71.11 per share and the market cap of $540 million, Barrett Business Services stock is estimated to be possible value trap. GF Value for Barrett Business Services is shown in the chart below.
The reason we think that Barrett Business Services stock might be a value trap is because
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Barrett Business Services has a cash-to-debt ratio of 6.14, which is better than 76% of the companies in Business Services industry. GuruFocus ranks the overall financial strength of Barrett Business Services at 7 out of 10, which indicates that the financial strength of Barrett Business Services is fair. This is the debt and cash of Barrett Business Services over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Barrett Business Services has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $880.8 million and earnings of $4.39 a share. Its operating margin is 4.10%, which ranks in the middle range of the companies in Business Services industry. Overall, the profitability of Barrett Business Services is ranked 6 out of 10, which indicates fair profitability. This is the revenue and net income of Barrett Business Services 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 Barrett Business Services is -2%, which ranks worse than 67% of the companies in Business Services industry. The 3-year average EBITDA growth rate is 6%, which ranks in the middle range of the companies in Business Services 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, Barrett Business Services's ROIC was 5.39, while its WACC came in at 11.09. The historical ROIC vs WACC comparison of Barrett Business Services is shown below:
In summary, the stock of Barrett Business Services (NAS:BBSI, 30-year Financials) is believed to be possible value trap. The company's financial condition is fair and its profitability is fair. Its growth ranks in the middle range of the companies in Business Services industry. To learn more about Barrett Business Services stock, you can check out its 30-year Financials here.
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