Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is JinkoSolar Holding Co Ltd (JKS, Financial). The stock, currently priced at $35.01, recorded a gain of 5.39% in a day and a 3-month increase of 9.59%. The stock's fair valuation is $105.67, as indicated by its GF Value.
Understanding GF Value
The GF Value is a unique measure that represents the intrinsic value of a stock, calculated based on historical trading multiples, an adjustment factor reflecting past returns and growth, and future business performance estimates. It serves as a benchmark for what the stock should be trading at, with the expectation that the stock price will gravitate around this line. A stock significantly above the GF Value Line is considered overvalued, and one significantly below is considered to have a higher potential return.
However, before making an investment decision, a deeper analysis is crucial. Despite JinkoSolar Holding Co's seemingly attractive valuation, potential risk factors should not be ignored. These risks are reflected in its low Altman Z-score of 1.43, and a Beneish M-Score of -1.31, which exceeds the -1.6 threshold for potential earnings manipulation. These indicators suggest that JinkoSolar Holding Co, despite its apparent undervaluation, might be a potential value trap, underlining the importance of thorough due diligence.
The Significance of Financial Scores
The Altman Z-score, developed by Professor Edward I. Altman, predicts the likelihood of bankruptcy within two years by considering five financial ratios. A score below 1.8 indicates a high risk of financial distress. The Beneish M-Score, created by Professor Messod Beneish, uses eight financial variables to detect earnings manipulation. A negative score, particularly one worse than -1.6, suggests a high probability of earnings manipulation.
Company Snapshot
JinkoSolar Holding Co Ltd is a key player in the photovoltaic industry, with a vertically integrated solar power product value chain, from silicon wafers to solar modules, sold under the JinkoSolar brand. The company's market cap stands at $1.80 billion, with sales reaching $16.30 billion and an operating margin of 6.74%. JinkoSolar Holding Co's Return on Invested Capital (ROIC) is 7.4%, against a Weighted Average Cost of Capital (WACC) of 2.91%. This financial profile, when juxtaposed with the GF Value, suggests an estimation of fair value that merits further exploration.
JinkoSolar Holding Co's Financial Health Concerns
Analyzing JinkoSolar Holding Co's financial ratios reveals potential distress. The Retained Earnings to Total Assets ratio, a measure of reinvestment capability or debt management, shows a declining trend: 2021: 0.07; 2022: 0.04; 2023: 0.07. This decline indicates a reduced ability to reinvest or manage debt, affecting the company's Altman Z-score.
The Gross Margin percentage, which reflects gross profit relative to revenue, has contracted by 1.62% over the past three years (2021: 16.30%; 2022: 15.41%; 2023: 16.52%), signaling potential issues with profitability and operational costs.
JinkoSolar Holding Co's Year-Over-Year change in Revenue shows a significant surge of 100.97% in the last 12 months, which could indicate aggressive income recognition practices.
The Depreciation, Depletion, and Amortization (DDA) rate, which reflects asset value loss over time, has not changed in the past three years, potentially suggesting earnings manipulation by extending asset lifespans.
The Total Accruals to Total Assets (TATA) ratio is positive at 0.027, raising concerns about the quality of earnings and the possibility of aggressive income recognition.
Conclusion: The Value Trap Potential of JinkoSolar Holding Co
In light of these financial indicators, JinkoSolar Holding Co Ltd (JKS, Financial) presents characteristics of a potential value trap. The combination of a low Altman Z-score, a concerning Beneish M-Score, declining retained earnings, contracting gross margins, and a significant revenue surge all contribute to the suspicion of financial instability and earnings manipulation. These factors, along with a positive TATA ratio, suggest that the company's attractive valuation may be misleading, warranting investors to exercise caution and conduct comprehensive due diligence.
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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.
