The stock of Medical Developments International (ASX:MVP, 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 AUD 5.01 per share and the market cap of AUD 357 million, Medical Developments International stock shows every sign of being possible value trap. GF Value for Medical Developments International is shown in the chart below.
The reason we think that Medical Developments International 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. Medical Developments International has a cash-to-debt ratio of 10.30, which ranks better than 76% of the companies in Drug Manufacturers industry. Based on this, GuruFocus ranks Medical Developments International’s financial strength as 7 out of 10, suggesting fair balance sheet. This is the debt and cash of Medical Developments International 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. Medical Developments International has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of AUD 24.2 million and loss of AUD 0.015 a share. Its operating margin is -5.90%, which ranks worse than 66% of the companies in Drug Manufacturers industry. Overall, the profitability of Medical Developments International is ranked 6 out of 10, which indicates fair profitability. This is the revenue and net income of Medical Developments International 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 Medical Developments International is 7.1%, which ranks in the middle range of the companies in Drug Manufacturers industry. The 3-year average EBITDA growth rate is -45%, which ranks in the bottom 10% of the companies in Drug Manufacturers 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, Medical Developments International’s ROIC was -1.63, while its WACC came in at 11.46. The historical ROIC vs WACC comparison of Medical Developments International is shown below:
In conclusion, Medical Developments International (ASX:MVP, 30-year Financials) stock gives every indication of being possible value trap. The company's financial condition is fair and its profitability is fair. Its growth ranks in the bottom 10% of the companies in Drug Manufacturers industry. To learn more about Medical Developments International stock, you can check out its 30-year Financials here.
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