The stock of Tellurian (NAS:TELL, 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 $2.46 per share and the market cap of $1 billion, Tellurian stock is believed to be possible value trap. GF Value for Tellurian is shown in the chart below.
The reason we think that Tellurian stock might be a value trap is because Tellurian has an Altman Z-score of 0.04, which indicates that the financial condition of the company is in the distressed zone and implies a higher risk of bankruptcy. An Altman Z-score of above 2.99 would be better, indicating safe financial conditions. To learn more about how the Z-score measures the financial risk of the 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. Tellurian has a cash-to-debt ratio of 3.12, which is better than 72% of the companies in Oil & Gas industry. GuruFocus ranks the overall financial strength of Tellurian at 5 out of 10, which indicates that the financial strength of Tellurian is fair. This is the debt and cash of Tellurian 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. Tellurian has been profitable 2 over the past 10 years. Over the past twelve months, the company had a revenue of $37.9 million and loss of $0.71 a share. Its operating margin is -164.93%, which ranks in the bottom 10% of the companies in Oil & Gas industry. Overall, the profitability of Tellurian is ranked 1 out of 10, which indicates poor profitability. This is the revenue and net income of Tellurian over the past years:
Growth is probably one of the most important factors 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. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. Tellurian's 3-year average revenue growth rate is better than 95% of the companies in Oil & Gas industry. Tellurian's 3-year average EBITDA growth rate is 37.9%, which ranks better than 85% of the companies in Oil & Gas 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, Tellurian's ROIC was -21.31, while its WACC came in at 18.90. The historical ROIC vs WACC comparison of Tellurian is shown below:
To conclude, the stock of Tellurian (NAS:TELL, 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 better than 85% of the companies in Oil & Gas industry. To learn more about Tellurian stock, you can check out its 30-year Financials here.
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