Is Alarum Technologies (ALAR) Too Good to Be True? A Comprehensive Analysis of a Potential Value Trap

Unveiling the Risks and Rewards of Investing in Alarum Technologies

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Value-focused investors are constantly on the lookout for stocks that are priced below their intrinsic value. One such stock that catches the eye is Alarum Technologies Ltd (ALAR, Financial). Currently priced at $2.63, the stock recorded a gain of 12.18% in a day and a 3-month increase of 8.33%. According to its GF Value, the stock's fair valuation stands at $6.79.

Understanding GF Value

The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors: historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance. We believe the GF Value Line is the fair value that the stock should be traded at.


However, investors need to conduct a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Alarum Technologies (ALAR, Financial) should not be overlooked. These risks are primarily reflected through its low Altman Z-score of -6.19, and the company's revenues and earnings have been on a downward trend over the past five years. This raises a critical question: Is Alarum Technologies a hidden gem or a value trap?

Deciphering Altman Z-score

Before delving into the details, it's crucial to understand what the Altman Z-score entails. Invented by New York University Professor Edward I. Altman in 1968, the Z-Score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.

Introducing Alarum Technologies

Alarum Technologies Ltd is a company engaged in the information security business. It has two Internet access segments which include Enterprise Internet Access and Consumer Internet Access. Its Enterprise Internet Access offers web data collection and a private Internet browsing platform and Consumer Internet Access provides solutions for secure and private Internet browsing. Geographically, the company has a presence in UK Virgin Islands, Israel, the USA, and others, and generate a majority of its revenue from the Virgin Island followed by the United States.


Alarum Technologies's Low Altman Z-Score: A Breakdown of Key Drivers

A dissection of Alarum Technologies's Altman Z-score reveals that the company's financial health may be weak, suggesting possible financial distress:

The first factor to consider is a measure of short-term liquidity. This is calculated as the working capital divided by total assets. Evaluating the data provided: 2021: 0.18; 2022: 0.01; 2023: -0.06, it's clear that Alarum Technologies has experienced a recent decline following an initial increase in its Working Capital to Total Assets ratio over the past few years. This decline suggests potential liquidity issues that the company may be facing. The ratio is strikingly low, which unfavorably influences the overall Z-Score.

The Retained Earnings to Total Assets ratio provides insights into a company's capability to reinvest its profits or manage debt. Evaluating Alarum Technologies's historical data, 2021: -2.20; 2022: -3.22; 2023: -4.46, we observe a declining trend in this ratio. This downward movement indicates Alarum Technologies's diminishing ability to reinvest in its business or effectively manage its debt. Consequently, it exerts a negative impact on its Z-Score.

The EBIT to Total Assets ratio serves as a crucial barometer of a company's operational effectiveness, correlating earnings before interest and taxes (EBIT) to total assets. An analysis of Alarum Technologies's EBIT to Total Assets ratio from historical data (2021: -0.28; 2022: -0.58; 2023: -0.40) indicates a recent dip following an initial rise. This reduction suggests that Alarum Technologies might not be utilizing its assets to their full potential to generate operational profits, which could be negatively affecting the company's overall Z-score.

The Bearish Signs: Declining Revenues and Earnings

One of the telltale indicators of a company's potential trouble is a sustained decline in revenues. In the case of Alarum Technologies, both the revenue per share (evident from the last five years' TTM data: 2019: 213.57; 2020: 73.55; 2021: 2.91; 2022: 4.49; 2023: 6.20; ) and the 5-year revenue growth rate (-66.7%) have been on a consistent downward trajectory. This pattern may point to underlying challenges such as diminishing demand for Alarum Technologies's products, or escalating competition in its market sector. Either scenario can pose serious risks to the company's future performance, warranting a thorough analysis by investors.


The Red Flag: Sluggish Earnings Growth

Despite its low price-to-fair-value ratio, Alarum Technologies's falling revenues and earnings cast a long shadow over its investment attractiveness. A low price relative to intrinsic value can indeed suggest an investment opportunity, but only if the company's fundamentals are sound or improving. In Alarum Technologies's case, the declining revenues, EBITDA, and earnings growth suggest that the company's issues may be more than just cyclical fluctuations.

Without a clear turnaround strategy, there's a risk that the company's performance could continue to deteriorate, leading to further price declines. In such a scenario, the low price-to-GF-Value ratio may be more indicative of a value trap than a value opportunity.


In conclusion, despite its attractive valuation, Alarum Technologies (ALAR, Financial) might be a potential value trap. The company's low Altman Z-score, declining revenues, and earnings, all point towards financial distress. Therefore, it is critical for investors to conduct thorough due diligence before making an investment decision.

GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen . Investors can find stocks with good revenue and earnings growth using GuruFocus' Peter Lynch Growth with Low Valuation Screener.


I/We may personally own shares in some of the companies mentioned above. However, those positions are not material to either the company or to my/our portfolios.