The stock of Prosus NV (OTCPK:PROSY, 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 $22.15 per share and the market cap of $178.6 billion, Prosus NV stock shows every sign of being possible value trap. GF Value for Prosus NV is shown in the chart below.
The reason we think that Prosus NV stock might be a value trap is because its Piotroski F-score is only 2, 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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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. Prosus NV has a cash-to-debt ratio of 1.68, which ranks worse than 70% of the companies in Interactive Media industry. Based on this, GuruFocus ranks Prosus NV's financial strength as 6 out of 10, suggesting fair balance sheet. This is the debt and cash of Prosus NV over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Prosus NV has been profitable 4 over the past 10 years. Over the past twelve months, the company had a revenue of $4.1 billion and earnings of $0.524 a share. Its operating margin is -13.51%, which ranks worse than 72% of the companies in Interactive Media industry. Overall, GuruFocus ranks the profitability of Prosus NV at 2 out of 10, which indicates poor profitability. This is the revenue and net income of Prosus NV 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 Prosus NV is 8.7%, which ranks in the middle range of the companies in Interactive Media industry. The 3-year average EBITDA growth rate is 64.1%, which ranks better than 88% of the companies in Interactive Media industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Prosus NV's return on invested capital is -1.83, and its cost of capital is 5.62. The historical ROIC vs WACC comparison of Prosus NV is shown below:
Overall, The stock of Prosus NV (OTCPK:PROSY, 30-year Financials) gives every indication of being possible value trap. The company's financial condition is fair and its profitability is poor. Its growth ranks better than 88% of the companies in Interactive Media industry. To learn more about Prosus NV stock, you can check out its 30-year Financials here.
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