Is Alkaline Water Co (WTER) Too Good to Be True? A Comprehensive Analysis of a Potential Value Trap
Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Alkaline Water Co Inc (NASDAQ:WTER). The stock, which is currently priced at $0.89, recorded a loss of 15.59% in a day and a 3-month decrease of 57.8%. The stock's fair valuation is $11.77, as indicated by its GF Value.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on historical multiples, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.
If the stock price 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.
Unmasking Potential Risks
However, investors need to consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Alkaline Water Co should not be ignored. These risks are primarily reflected through its low Altman Z-score of -11.73. These indicators suggest that Alkaline Water Co, despite its apparent undervaluation, might be a potential value trap.
Decoding the Altman Z-score
Before delving into the details, let's understand what the Altman Z-score entails. The Z-Score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
Company Introduction
Alkaline Water Co Inc is engaged in the business of distributing and marketing bottled alkaline water for retail consumers of different sizes. The firm sells its product in 500ml, 700ml, 1-liter, 1.5-liter 3-liter, and 1-gallon sizes. Its only operating geographical segment being the United States of America.
Alkaline Water Co's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of Alkaline Water Co's Altman Z-score reveals Alkaline Water Co's financial health may be weak, suggesting possible financial distress. The first factor we need to consider is a measure of short-term liquidity. This is calculated as the working capital divided by total assets. When we evaluate the data provided: 2021: 0.03; 2022: -0.06; 2023: -0.08, it's clear that Alkaline Water Co has experienced a recent decline following an initial increase in its Working Capital to Total Assets ratio over the past few years.
The Retained Earnings to Total Assets ratio provides insights into a company's capability to reinvest its profits or manage debt. Evaluating Alkaline Water Co's historical data, 2021: -2.85; 2022: -4.87; 2023: -7.60, we observe a declining trend in this ratio. This downward movement indicates Alkaline Water Co's diminishing ability to reinvest in its business or effectively manage its debt.
Conclusion
Considering the above factors, despite its seemingly attractive valuation, Alkaline Water Co may be a potential value trap. The company's declining financial health, reflected in its low Altman Z-score, suggests possible financial distress. Investors need to consider these risk factors before making an investment decision. GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen .
This article first appeared on GuruFocus.
