Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Datasea Inc (DTSS, Financial). The stock, currently priced at 0.42, recorded a loss of 8.83% in a day and a 3-month decrease of 57.34%. The stock's fair valuation is $5.19, 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. It is calculated based on historical multiples 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.
The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. 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.
Unveiling the Risks: Datasea's Financial Health
Despite its seemingly attractive valuation, certain risk factors associated with Datasea Inc (DTSS, Financial) should not be ignored. These risks are primarily reflected through its low Altman Z-score of -13.88. This indicator suggests that Datasea, 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 Altman Z-Score
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 Snapshot: Datasea Inc
Datasea Inc is a development stage company engaged in Internet security products. Its offerings include Internet Security Equipment, New Media Advertising Service, Micro Marketing Service, Internet Service Provider (ISP) Connecting Service, and Big Data Processing Service. The business activity of the group functions primarily through China.
Datasea's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of Datasea's Altman Z-score reveals Datasea's financial health may be weak, suggesting possible financial distress.
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 Datasea's EBIT to Total Assets ratio from historical data (2021: -0.59; 2022: -0.62; 2023: -1.98) indicates a descending trend. This reduction suggests that Datasea 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.
Conclusion: The Value Trap Dilemma
While Datasea's stock appears undervalued according to its GF Value, the company's low Altman Z-Score and declining EBIT to Total Assets ratio suggest that it might be a potential value trap. Therefore, investors should proceed with caution and 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 .
