The stock of Sinopec Shanghai Petrochemical Co (NYSE:SHI, 30-year Financials) shows every sign 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 $25.28 per share and the market cap of $2.7 billion, Sinopec Shanghai Petrochemical Co stock appears to be possible value trap. GF Value for Sinopec Shanghai Petrochemical Co is shown in the chart below.
The reason we think that Sinopec Shanghai Petrochemical Co stock might be a value trap is because its Piotroski F-score is only 3, out of the total of 9. Such a low Piotroski F-score indicates the company is getting worse in multiple aspects in the areas of profitability, funding and efficiency. In this case, investors should look beyond the low valuation of the company and make sure it has no long-term risks. To learn more about how the Piotroski F-score measures the business trend of a 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. Sinopec Shanghai Petrochemical Co has a cash-to-debt ratio of 2.66, which is better than 71% of the companies in Oil & Gas industry. The overall financial strength of Sinopec Shanghai Petrochemical Co is 7 out of 10, which indicates that the financial strength of Sinopec Shanghai Petrochemical Co is fair. This is the debt and cash of Sinopec Shanghai Petrochemical Co 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. Sinopec Shanghai Petrochemical Co has been profitable 8 years over the past 10 years. During the past 12 months, the company had revenues of $9.1 billion and earnings of $1.098 a share. Its operating margin of -1.14% in the middle range of the companies in Oil & Gas industry. Overall, GuruFocus ranks Sinopec Shanghai Petrochemical Co's profitability as fair. This is the revenue and net income of Sinopec Shanghai Petrochemical Co over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Sinopec Shanghai Petrochemical Co is 10.1%, which ranks better than 74% of the companies in Oil & Gas industry. The 3-year average EBITDA growth is -22.4%, which ranks worse than 75% of the companies in Oil & Gas 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, Sinopec Shanghai Petrochemical Co's return on invested capital is -2.63, and its cost of capital is 4.35. The historical ROIC vs WACC comparison of Sinopec Shanghai Petrochemical Co is shown below:
In short, Sinopec Shanghai Petrochemical Co (NYSE:SHI, 30-year Financials) stock gives every indication of being possible value trap. The company's financial condition is fair and its profitability is fair. Its growth ranks worse than 75% of the companies in Oil & Gas industry. To learn more about Sinopec Shanghai Petrochemical Co stock, you can check out its 30-year Financials here.
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