The stock of Editas Medicine (NAS:EDIT, 30-year Financials) is estimated 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 $34.11 per share and the market cap of $2.3 billion, Editas Medicine stock is believed to be possible value trap. GF Value for Editas Medicine is shown in the chart below.
The reason we think that Editas Medicine 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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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. Editas Medicine has a cash-to-debt ratio of 10000.00, which is in the middle range of the companies in Biotechnology industry. GuruFocus ranks the overall financial strength of Editas Medicine at 7 out of 10, which indicates that the financial strength of Editas Medicine is fair. This is the debt and cash of Editas Medicine 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. Editas Medicine has been profitable 0 years over the past 10 years. During the past 12 months, the company had revenues of $91.5 million and loss of $2.17 a share. Its operating margin of -158.57% in the middle range of the companies in Biotechnology industry. Overall, GuruFocus ranks Editas Medicine's profitability as poor. This is the revenue and net income of Editas Medicine 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 Editas Medicine is 65.7%, which ranks better than 89% of the companies in Biotechnology industry. The 3-year average EBITDA growth rate is 8.3%, which ranks in the middle range of the companies in Biotechnology 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, Editas Medicine's ROIC was -128.12, while its WACC came in at 11.47. The historical ROIC vs WACC comparison of Editas Medicine is shown below:
To conclude, the stock of Editas Medicine (NAS:EDIT, 30-year Financials) is estimated to be possible value trap. The company's financial condition is fair and its profitability is poor. Its growth ranks in the middle range of the companies in Biotechnology industry. To learn more about Editas Medicine stock, you can check out its 30-year Financials here.
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