The stock of The a2 Milk Co (OTCPK:ACOPY, 30-year Financials) is believed 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 $5.83 per share and the market cap of $4.3 billion, The a2 Milk Co stock appears to be possible value trap. GF Value for The a2 Milk Co is shown in the chart below.
The reason we think that The a2 Milk Co stock might be a value trap is because
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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. The a2 Milk Co has a cash-to-debt ratio of 44.34, which is better than 89% of the companies in the industry of Consumer Packaged Goods. The overall financial strength of The a2 Milk Co is 9 out of 10, which indicates that the financial strength of The a2 Milk Co is strong. This is the debt and cash of The a2 Milk Co 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. The a2 Milk Co has been profitable 9 over the past 10 years. Over the past twelve months, the company had a revenue of $1.1 billion and earnings of $0.29 a share. Its operating margin is 28.54%, which ranks better than 97% of the companies in the industry of Consumer Packaged Goods. Overall, the profitability of The a2 Milk Co is ranked 8 out of 10, which indicates strong profitability. This is the revenue and net income of The a2 Milk Co over the past years:
Growth is probably one of the most important factors 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. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. The a2 Milk Co's 3-year average revenue growth rate is better than 96% of the companies in the industry of Consumer Packaged Goods. The a2 Milk Co's 3-year average EBITDA growth rate is 56.8%, which ranks better than 95% of the companies in the industry of Consumer Packaged Goods.
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, The a2 Milk Co's return on invested capital is 80.85, and its cost of capital is 3.20. The historical ROIC vs WACC comparison of The a2 Milk Co is shown below:
In summary, The stock of The a2 Milk Co (OTCPK:ACOPY, 30-year Financials) gives every indication of being possible value trap. The company's financial condition is strong and its profitability is strong. Its growth ranks better than 95% of the companies in the industry of Consumer Packaged Goods. To learn more about The a2 Milk Co stock, you can check out its 30-year Financials here.
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