The stock of CD Projekt SA (OTCPK:OTGLY, 30-year Financials) appears 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 $10.38 per share and the market cap of $4.2 billion, CD Projekt SA stock gives every indication of being possible value trap. GF Value for CD Projekt SA is shown in the chart below.
The reason we think that CD Projekt SA stock might be a value trap is because
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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. CD Projekt SA has a cash-to-debt ratio of 44.04, which is better than 71% of the companies in Interactive Media industry. GuruFocus ranks the overall financial strength of CD Projekt SA at 8 out of 10, which indicates that the financial strength of CD Projekt SA is strong. This is the debt and cash of CD Projekt SA 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. CD Projekt SA has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $571.5 million and earnings of $0.767 a share. Its operating margin is 54.20%, which ranks better than 97% of the companies in Interactive Media industry. Overall, GuruFocus ranks the profitability of CD Projekt SA at 8 out of 10, which indicates strong profitability. This is the revenue and net income of CD Projekt SA 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 CD Projekt SA is 66%, which ranks better than 93% of the companies in Interactive Media industry. The 3-year average EBITDA growth is 77.8%, which ranks better than 91% 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, CD Projekt SA's return on invested capital is 93.24, and its cost of capital is 5.48. The historical ROIC vs WACC comparison of CD Projekt SA is shown below:
Overall, the stock of CD Projekt SA (OTCPK:OTGLY, 30-year Financials) shows every sign of being possible value trap. The company's financial condition is strong and its profitability is strong. Its growth ranks better than 91% of the companies in Interactive Media industry. To learn more about CD Projekt SA stock, you can check out its 30-year Financials here.
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