Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Connexa Sports Technologies Inc (CNXA, Financial). The stock, which is currently priced at 0.08, recorded a loss of 25.41% in a day and a 3-month decrease of 60.23%. The stock's fair valuation is $13.47, as indicated by its GF Value.
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:
- 1. Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- 2. GuruFocus adjustment factor based on the company's past returns and growth.
- 3. Future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price 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.
However, investors need to consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Connexa Sports Technologies should not be ignored. These risks are primarily reflected through its low Piotroski F-score of 2, Altman Z-score of -14.71. These indicators suggest that Connexa Sports Technologies, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Decoding the Piotroski F-score and Altman Z-score
The Piotroski F-score, created by accounting professor Joseph Piotroski, is a tool used to assess the strength of a company's financial health. The score is based on nine criteria that fall into three categories: profitability, leverage/liquidity/ source of funds, and operating efficiency. The overall score ranges from 0 to 9, with higher scores indicating healthier financials. Connexa Sports Technologies's current Piotroski F-Score, however, falls in the lower end of this spectrum, indicating potential red flags for investors.
Before delving into the details, let's 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.
Company Overview: Connexa Sports Technologies Inc (CNXA, Financial)
Connexa Sports Technologies Inc is a connected sports company delivering products, technologies, and services across the Watch, Play, Learn commercial and subscription-as-a-service activities in sports. Digital disruption is restructuring how sports are enjoyed, consumed, and monetized. Its portfolio of brands includes Slinger, PlaySight Interactive, GAMEFACE.AI and Foundation Tennis.
Analysis of Connexa Sports Technologies's Profitability
Firstly, let's address profitability. One significant component of the F-Score is a positive return on assets (ROA). A closer look at Connexa Sports Technologies's ROA reveals a worrying trend of negative returns. This indicates the company's inability to generate profit from its assets - a fundamental concern for any investor.
Observing the financials of Connexa Sports Technologies, it's important to note that the cash flow from operations over the trailing twelve months (TTM) stands at $-10.51 million, whereas the net income in the same period is significantly higher at $-71.31 million. The Piotroski F-score considers this discrepancy as a potential red flag. The rationale behind this is that a company's operating cash flow is a more direct and less manipulated measure of its cash-generating ability than net income. Net income, while important, is susceptible to accounting treatments and non-cash items which can distort the true cash profitability of the company. If a company consistently shows lower cash flows from operations relative to its net income, it could indicate that the earnings quality is poor and the company might have difficulties sustaining its operations or financing its obligations, a fact which could negatively impact its financial stability and investor confidence.
Leverage, Liquidity and Source of Funds: A Worrying Trend
Assessing the aspect of leverage, liquidity, and sources of funds, Connexa Sports Technologies demonstrates an alarming rise in its debt-to-total assets ratio over the past three years. The provided data shows 2021: 1.56; 2022: 0.51; 2023: 0.12, expressed as percentages. A higher debt ratio suggests that Connexa Sports Technologies is increasingly financing its assets through debt, thereby escalating its financial risk. The Piotroski F-Score views this as a negative indicator, further cautioning investors about Connexa Sports Technologies.
Examining Connexa Sports Technologies's financial stability, there's a notable decrease in its current ratio over the past three years, as shown by the data 2021: 0.40; 2022: 0.53; 2023: 0.20, which is expressed as percentages. The current ratio is a key indicator of a company's short-term financial health, as it gauges the ability to cover short-term liabilities with short-term assets. A declining current ratio suggests that Connexa Sports Technologies's liquidity and capability to manage immediate financial obligations are deteriorating.
Operating Efficiency: A Darker Picture
Examining the data provided: 2021: 2.68; 2022: 4.19; 2023: 13.27, it becomes evident that Connexa Sports Technologies has seen an increase in its Diluted Average Shares Outstanding over the past three years. This trend signals that the company has issued more shares. While issuing additional shares can provide immediate capital for the business, it can also lead to the dilution of existing shares' value. This dilution occurs because the earnings of the company now have to be divided among a larger pool of shares, which could decrease Earnings Per Share (EPS). Consequently, if the company's earnings don't grow at a pace that matches or exceeds this share increase, it could lead to a reduction in the value perceived by existing shareholders, potentially impacting their investment returns. Hence, while additional share issuance may provide necessary capital, it is important to monitor its impact on shareholder value carefully.
While the Piotroski F-score is not the only lens through which to view a potential investment, it is a robust and comprehensive tool for evaluating a company's financial health. Unfortunately for Connexa Sports Technologies, its current score suggests potential troubles. The company's low F-score, combined with its negative ROA and rising debt ratio, indicate potential financial distress. Furthermore, the decreasing current ratio suggests deteriorating liquidity, and the increasing diluted average shares outstanding could lead to value dilution for current shareholders.
Connexa Sports Technologies's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of Connexa Sports Technologies's Altman Z-score reveals Connexa Sports Technologies's financial health may be weak, suggesting possible financial distress:
The Retained Earnings to Total Assets ratio provides insights into a company's capability to reinvest its profits or manage debt. Evaluating Connexa Sports Technologies's historical data, 2021: -3.40; 2022: -3.94; 2023: -7.42, we observe a declining trend in this ratio. This downward movement indicates Connexa Sports Technologies's diminishing ability to reinvest in its business or effectively manage its debt. Consequently, it exerts a negative impact on its Z-Score.
When it comes to operational efficiency, a vital indicator for Connexa Sports Technologies is its asset turnover. The data: 2021: 3.06; 2022: 1.37; 2023: 0.30 from the past three years suggests a recent decline following an initial increase in this ratio. The asset turnover ratio reflects how effectively a company is using its assets to generate sales. Therefore, a drop in this ratio can signify reduced operational efficiency, potentially due to underutilization of assets or decreased market demand for the company's products or services. This shift in Connexa Sports Technologies's asset turnover underlines the need for the company to reassess its operational strategies to optimize asset usage and boost sales.
Conclusion: A Potential Value Trap?
Despite Connexa Sports Technologies's seemingly attractive valuation, the company's financial indicators suggest potential troubles. The low Piotroski F-score, negative ROA, rising debt ratio, decreasing current ratio, and increasing diluted average shares outstanding all point towards potential financial distress. Furthermore, the declining retained earnings to total assets ratio and the decreasing asset turnover ratio suggest issues with debt management and operational efficiency. These factors, combined with the company's low Altman Z-score, indicate that Connexa Sports Technologies might be a potential value trap. Therefore, investors are advised to exercise caution and conduct thorough due diligence before making an investment decision.
GuruFocus Premium members can find stocks with high Piotroski F-score using the following Screener: Piotroski F-score screener .
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