The stock of Electro Optic Systems Hldgs (ASX:EOS, 30-year Financials) shows every sign of being 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 4.62 per share and the market cap of AUD 696.5 million, Electro Optic Systems Hldgs stock gives every indication of being possible value trap. GF Value for Electro Optic Systems Hldgs is shown in the chart below.
The reason we think that Electro Optic Systems Hldgs 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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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. Electro Optic Systems Hldgs has a cash-to-debt ratio of 3.12, which is better than 73% of the companies in Aerospace & Defense industry. GuruFocus ranks the overall financial strength of Electro Optic Systems Hldgs at 7 out of 10, which indicates that the financial strength of Electro Optic Systems Hldgs is fair. This is the debt and cash of Electro Optic Systems Hldgs 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. Electro Optic Systems Hldgs has been profitable 5 over the past 10 years. Over the past twelve months, the company had a revenue of AUD 180.2 million and loss of AUD 0.189 a share. Its operating margin is -12.53%, which ranks worse than 82% of the companies in Aerospace & Defense industry. Overall, the profitability of Electro Optic Systems Hldgs is ranked 4 out of 10, which indicates poor profitability. This is the revenue and net income of Electro Optic Systems Hldgs 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 Electro Optic Systems Hldgs is 55.6%, which ranks better than 98% of the companies in Aerospace & Defense industry. The 3-year average EBITDA growth is -1.6%, which ranks in the middle range of the companies in Aerospace & Defense industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted 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. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Electro Optic Systems Hldgs's return on invested capital is -7.36, and its cost of capital is 13.78. The historical ROIC vs WACC comparison of Electro Optic Systems Hldgs is shown below:
In short, the stock of Electro Optic Systems Hldgs (ASX:EOS, 30-year Financials) appears 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 Aerospace & Defense industry. To learn more about Electro Optic Systems Hldgs stock, you can check out its 30-year Financials here.
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