Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Fresenius Medical Care AG. KGaA (FMS, Financial). The stock, which is currently priced at 17.04, recorded a loss of 18.69% in a day and a 3-month decrease of 28.78%. The stock's fair valuation is $35.31, 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: 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. 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.
Considering the Risks
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 Fresenius Medical Care AG. KGaA should not be ignored. These risks are primarily reflected through its low Altman Z-score of 1.54. These indicators suggest that Fresenius Medical Care AG. KGaA, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Understanding 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
Fresenius Medical Care AG. KGaA is the largest dialysis company in the world, treating about 345,000 patients from over 4,100 clinics across the globe as of December 2022. In addition to providing dialysis services, the firm is a leading supplier of dialysis products, including machines, dialyzers, and concentrates. Fresenius accounts for about 35% of the global dialysis products market and benefits from being the world's only fully integrated dialysis business. Services account for roughly 80% of firmwide revenue, including care coordination and ancillary operations, while products account for the other roughly 20%. Products typically enjoy a higher margin, making them a strong contributor to the bottom line.
Fresenius Medical Care AG. KGaA's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of Fresenius Medical Care AG. KGaA's Altman Z-score reveals Fresenius Medical Care AG. KGaA'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 Fresenius Medical Care AG. KGaA's historical data, 2021: 0.31; 2022: 0.30; 2023: 0.30, we observe a recent decline following an initial increase in this ratio. This downward movement indicates Fresenius Medical Care AG. KGaA'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 Fresenius Medical Care AG. KGaA's EBIT to Total Assets ratio from historical data (2021: 0.06; 2022: 0.05; 2023: 0.04) indicates a descending trend. This reduction suggests that Fresenius Medical Care AG. KGaA 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
While Fresenius Medical Care AG. KGaA (FMS, Financial) may initially appear as an attractive investment opportunity, a deeper analysis reveals potential risks. The company's low Altman Z-score and declining financial ratios suggest that it may be a potential value trap. As always, thorough due diligence is essential before making any investment decisions.
GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen .
This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
