- By GF Value
The stock of NewAge (NAS:NBEV, 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 $2.15 per share and the market cap of $291.1 million, NewAge stock is believed to be possible value trap. GF Value for NewAge is shown in the chart below.
The reason we think that NewAge stock might be a value trap is because NewAge has an Altman Z-score of 0.48, 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.
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. NewAge has a cash-to-debt ratio of 0.58, which is in the middle range of the companies in the industry of Beverages - Non-Alcoholic. GuruFocus ranks the overall financial strength of NewAge at 4 out of 10, which indicates that the financial strength of NewAge is poor. This is the debt and cash of NewAge over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. NewAge has been profitable 0 over the past 10 years. Over the past twelve months, the company had a revenue of $279.5 million and loss of $0.41 a share. Its operating margin is -10.77%, which ranks worse than 87% of the companies in the industry of Beverages - Non-Alcoholic. Overall, the profitability of NewAge is ranked 1 out of 10, which indicates poor profitability. This is the revenue and net income of NewAge 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. NewAge's 3-year average revenue growth rate is better than 86% of the companies in the industry of Beverages - Non-Alcoholic. NewAge's 3-year average EBITDA growth rate is -69.1%, which ranks in the bottom 10% of the companies in the industry of Beverages - Non-Alcoholic.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. 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. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, NewAge's return on invested capital is -15.16, and its cost of capital is 4.97. The historical ROIC vs WACC comparison of NewAge is shown below:
To conclude, the stock of NewAge (NAS:NBEV, 30-year Financials) is believed to be possible value trap. The company's financial condition is poor and its profitability is poor. Its growth ranks in the bottom 10% of the companies in the industry of Beverages - Non-Alcoholic. To learn more about NewAge stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.