Does The9 Limited’s (NCTY) -70.5% EPS Decline Reflect A Long-Term Trend?
After looking at The9 Limited’s (NASDAQ:NCTY) latest earnings announcement (31 December 2016), I found it useful to revisit the company’s performance in the past couple of years and assess this against the most recent figures. As a long-term investor I tend to focus on earnings trend, rather than a single number at one point in time. Also, comparing it against an industry benchmark to understand whether it outperformed, or is simply riding an industry wave, is a crucial aspect. Below is a brief commentary on my key takeaways. See our latest analysis for NCTY
Did NCTY perform worse than its track record and industry?
For the purpose of this commentary, I like to use the ‘latest twelve-month’ data, which annualizes the most recent half-year data, or in some cases, the latest annual report is already the most recent financial year data. This enables me to assess many different companies on a more comparable basis, using the most relevant data points. For The9, the latest twelve-month earnings -CN¥676.7M, which, against the previous year’s level, has become more negative. Since these values are fairly short-term, I’ve calculated an annualized five-year value for NCTY’s net income, which stands at -CN¥412.9M. This doesn’t look much better, since earnings seem to have consistently been getting more and more negative over time.
We can further assess The9’s loss by looking at what’s going on in the industry along with within the company. Firstly, I want to briefly look into the line items. Revenue growth over past few years has been negative at -19.23%. The key to profitability here is to make sure the company’s cost growth is well-managed. Scanning growth from a sector-level, the US software industry has been growing its average earnings by double-digit 18.04% in the prior twelve months, and 11.55% over the past five. This means that any tailwind the industry is deriving benefit from, The9 has not been able to gain as much as its average peer.
What does this mean?
While past data is useful, it doesn’t tell the whole story. With companies that are currently loss-making, it is always difficult to forecast what will happen in the future and when. The most valuable step is to examine company-specific issues The9 may be facing and whether management guidance has dependably been met in the past. I recommend you continue to research The9 to get a more holistic view of the stock by looking at:
1. Financial Health: Is NCTY’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
2. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
NB: Figures in this article are calculated using data from the last twelve months, which refer to the 12-month period ending on the last date of the month the financial statement is dated. This may not be consistent with full year annual report figures.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
