– By GF Value
The stock of Bright Scholar Education Holdings (NYSE:BEDU, 30-year Financials) gives every indication of being 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 $5.79 per share and the market cap of $691.3 million, Bright Scholar Education Holdings stock is believed to be possible value trap. GF Value for Bright Scholar Education Holdings is shown in the chart below.
The reason we think that Bright Scholar Education Holdings stock might be a value trap is because Bright Scholar Education Holdings has an Altman Z-score of 0.95, 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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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company’s financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Bright Scholar Education Holdings has a cash-to-debt ratio of 0.65, which which ranks worse than 69% of the companies in Education industry. The overall financial strength of Bright Scholar Education Holdings is 4 out of 10, which indicates that the financial strength of Bright Scholar Education Holdings is poor. This is the debt and cash of Bright Scholar Education Holdings over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Bright Scholar Education Holdings has been profitable 4 years over the past 10 years. During the past 12 months, the company had revenues of $482.7 million and earnings of $0.081 a share. Its operating margin of 7.14% in the middle range of the companies in Education industry. Overall, GuruFocus ranks Bright Scholar Education Holdings’s profitability as fair. This is the revenue and net income of Bright Scholar Education Holdings over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Bright Scholar Education Holdings is 28.6%, which ranks better than 87% of the companies in Education industry. The 3-year average EBITDA growth is 18.9%, which ranks better than 68% of the companies in Education industry.
One can also evaluate a company’s profitability by comparing its return on invested capital (ROIC) to its weighted average 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 return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Bright Scholar Education Holdings’s ROIC is 1.75 while its WACC came in at 5.29. The historical ROIC vs WACC comparison of Bright Scholar Education Holdings is shown below:
In summary, the stock of Bright Scholar Education Holdings (NYSE:BEDU, 30-year Financials) shows every sign of being possible value trap. The company’s financial condition is poor and its profitability is fair. Its growth ranks better than 68% of the companies in Education industry. To learn more about Bright Scholar Education Holdings stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.