- By GF Value
The stock of Energous (NAS:WATT, 30-year Financials) is believed 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 $2.7 per share and the market cap of $165.2 million, Energous stock shows every sign of being possible value trap. GF Value for Energous is shown in the chart below.
The reason we think that Energous stock might be a value trap is because
Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Energous has a cash-to-debt ratio of 36.18, which ranks better than 85% of the companies in Hardware industry. Based on this, GuruFocus ranks Energous's financial strength as 6 out of 10, suggesting fair balance sheet. This is the debt and cash of Energous over the past years:
It is less risky to invest in profitable companies, especially those with consistent profitability over long term. A company with high profit margins is usually a safer investment than those with low profit margins. Energous has been profitable 0 over the past 10 years. Over the past twelve months, the company had a revenue of $0.3 million and loss of $0.78 a share. Its operating margin is -9755.35%, which ranks in the bottom 10% of the companies in Hardware industry. Overall, the profitability of Energous is ranked 1 out of 10, which indicates poor profitability. This is the revenue and net income of Energous over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Energous is -47.1%, which ranks in the bottom 10% of the companies in Hardware industry. The 3-year average EBITDA growth rate is 30.4%, which ranks better than 83% of the companies in Hardware 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, Energous's ROIC was -935.48, while its WACC came in at 22.84. The historical ROIC vs WACC comparison of Energous is shown below:
In closing, The stock of Energous (NAS:WATT, 30-year Financials) shows every sign of being possible value trap. The company's financial condition is fair and its profitability is poor. Its growth ranks better than 83% of the companies in Hardware industry. To learn more about Energous stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.