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Is Xerox Holdings (XRX) Too Good to Be True? A Comprehensive Analysis of a Potential Value Trap

Value-focused investors constantly seek stocks priced below their intrinsic value. One such stock that merits attention is Xerox Holdings Corp (NASDAQ:XRX). Currently priced at $15.44, the stock recorded a daily loss of 3.89% and a 3-month increase of 7.15%. However, the GF Value indicates a fair valuation of $23.19.

Understanding the GF Value

The GF Value represents a stock's current intrinsic value, derived from our exclusive method. It is calculated based on historical multiples, GuruFocus adjustment factors, and future business performance estimates. We believe the GF Value Line is the fair value at which the stock should trade. If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.

Is Xerox Holdings (XRX) Too Good to Be True? A Comprehensive Analysis of a Potential Value Trap
Is Xerox Holdings (XRX) Too Good to Be True? A Comprehensive Analysis of a Potential Value Trap

However, a more in-depth analysis is required before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Xerox Holdings Corp (NASDAQ:XRX) should not be overlooked. These risks are primarily reflected through its low Altman Z-score of 1.55. These indicators suggest that Xerox Holdings, despite its apparent undervaluation, might be a potential value trap.

What is the Altman Z-score?

The Altman Z-score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.

Company Overview

Xerox Holdings Corp is an original equipment manufacturing and software company. Xerox operates in one segment--design, development, and sale of printing technology and related solutions--while deriving 60% of its revenue from the U.S. and 40% from international markets.

Is Xerox Holdings (XRX) Too Good to Be True? A Comprehensive Analysis of a Potential Value Trap
Is Xerox Holdings (XRX) Too Good to Be True? A Comprehensive Analysis of a Potential Value Trap

Analysis of Xerox Holdings's Low Altman Z-Score

A dissection of Xerox Holdings's Altman Z-score reveals that the company's financial health may be weak, suggesting possible financial distress. The EBIT to Total Assets ratio serves as a crucial barometer of a company's operational effectiveness. An analysis of Xerox Holdings's EBIT to Total Assets ratio from historical data (2021: 0.03; 2022: -0.05; 2023: -0.02) indicates a descending trend. This reduction suggests that Xerox Holdings might not be utilizing its assets to their full potential to generate operational profits, which could be negatively affecting the company's overall Z-score.

Conclusion

Despite its seemingly attractive valuation, Xerox Holdings Corp (NASDAQ:XRX) might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making. GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen .

This article first appeared on GuruFocus.

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