- By GF Value
The stock of BB Seguridade Participacoes SA (OTCPK:BBSEY, 30-year Financials) appears to be 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 $4.295 per share and the market cap of $8.6 billion, BB Seguridade Participacoes SA stock shows every sign of being possible value trap. GF Value for BB Seguridade Participacoes SA is shown in the chart below.
The reason we think that BB Seguridade Participacoes SA stock might be a value trap is because
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. BB Seguridade Participacoes SA has a cash-to-debt ratio of 10000.00, which is better than 100% of the companies in Insurance industry. GuruFocus ranks the overall financial strength of BB Seguridade Participacoes SA at 8 out of 10, which indicates that the financial strength of BB Seguridade Participacoes SA is strong. This is the debt and cash of BB Seguridade Participacoes SA 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. BB Seguridade Participacoes SA has been profitable 9 years over the past 10 years. During the past 12 months, the company had revenues of $733.1 million and earnings of $0.374 a share. Its operating margin of 0.00% in the bottom 10% of the companies in Insurance industry. Overall, GuruFocus ranks BB Seguridade Participacoes SA's profitability as fair. This is the revenue and net income of BB Seguridade Participacoes SA over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus' research has found that growth is closely correlated with the long-term performance of a company's stock. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company's revenue and earnings are declining, the value of the company will decrease. BB Seguridade Participacoes SA's 3-year average revenue growth rate is in the middle range of the companies in Insurance industry. BB Seguridade Participacoes SA's 3-year average EBITDA growth rate is -0.8%, which ranks in the middle range of the companies in Insurance industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted 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 ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, BB Seguridade Participacoes SA's ROIC was 80.41, while its WACC came in at 6.28. The historical ROIC vs WACC comparison of BB Seguridade Participacoes SA is shown below:
To conclude, BB Seguridade Participacoes SA (OTCPK:BBSEY, 30-year Financials) stock appears to be possible value trap. The company's financial condition is strong and its profitability is fair. Its growth ranks in the middle range of the companies in Insurance industry. To learn more about BB Seguridade Participacoes SA stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.