The stock of LexinFintech Holdings (NAS:LX, 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 $9 per share and the market cap of $1.6 billion, LexinFintech Holdings stock is estimated to be possible value trap. GF Value for LexinFintech Holdings is shown in the chart below.
The reason we think that LexinFintech Holdings stock might be a value trap is because its Piotroski F-score is only 1, 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. Furthermore, LexinFintech Holdings has an Altman Z-score of 1.37, 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.
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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. LexinFintech Holdings has a cash-to-debt ratio of 0.17, which ranks in the middle range of the companies in Credit Services industry. Based on this, GuruFocus ranks LexinFintech Holdings's financial strength as 4 out of 10, suggesting poor balance sheet. This is the debt and cash of LexinFintech Holdings 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. LexinFintech Holdings has been profitable 3 years over the past 10 years. During the past 12 months, the company had revenues of $1.7 billion and earnings of $0.408 a share. Its operating margin of 12.67% in the middle range of the companies in Credit Services industry. Overall, GuruFocus ranks LexinFintech Holdings's profitability as poor. This is the revenue and net income of LexinFintech Holdings 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 LexinFintech Holdings is 28.5%, which ranks better than 84% of the companies in Credit Services industry. The 3-year average EBITDA growth rate is 427.9%, which ranks better than 100% of the companies in Credit 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, LexinFintech Holdings's ROIC was 7.94, while its WACC came in at 4.42. The historical ROIC vs WACC comparison of LexinFintech Holdings is shown below:
In closing, The stock of LexinFintech Holdings (NAS:LX, 30-year Financials) is believed to be possible value trap. The company's financial condition is poor and its profitability is poor. Its growth ranks better than 100% of the companies in Credit Services industry. To learn more about LexinFintech Holdings stock, you can check out its 30-year Financials here.
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