GrowLife Stock Is Estimated To Be Possible Value Trap
- By GF Value
The stock of GrowLife (OTCPK:PHOT, 30-year Financials) gives every indication of being 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 $0.163 per share and the market cap of $7.3 million, GrowLife stock is estimated to be possible value trap. GF Value for GrowLife is shown in the chart below.
The reason we think that GrowLife stock might be a value trap is because its Piotroski F-score is only 3, out of the total of 9. Such a low Piotroski F-score indicates the company is getting worse in multiple aspects in the areas of profitability, funding and efficiency. In this case, investors should look beyond the low valuation of the company and make sure it has no long-term risks. To learn more about how the Piotroski F-score measures the business trend of a company, please go here. Furthermore, GrowLife has an Altman Z-score of -51.26, 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.
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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. GrowLife has a cash-to-debt ratio of 0.14, which is worse than 82% of the companies in Industrial Distribution industry. GuruFocus ranks the overall financial strength of GrowLife at 2 out of 10, which indicates that the financial strength of GrowLife is poor. This is the debt and cash of GrowLife 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. GrowLife has been profitable 0 over the past 10 years. Over the past twelve months, the company had a revenue of $6.4 million and loss of $0.13 a share. Its operating margin is -30.74%, which ranks in the bottom 10% of the companies in Industrial Distribution industry. Overall, the profitability of GrowLife is ranked 1 out of 10, which indicates poor profitability. This is the revenue and net income of GrowLife 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 performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of GrowLife is 28.5%, which ranks better than 95% of the companies in Industrial Distribution industry. The 3-year average EBITDA growth rate is 2.2%, which ranks in the middle range of the companies in Industrial Distribution industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, GrowLife's return on invested capital is -23.42, and its cost of capital is 13.75. The historical ROIC vs WACC comparison of GrowLife is shown below:
Overall, GrowLife (OTCPK:PHOT, 30-year Financials) stock is estimated to be possible value trap. The company's financial condition is poor and its profitability is poor. Its growth ranks in the middle range of the companies in Industrial Distribution industry. To learn more about GrowLife stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
