The stock of Cielo SA (OTCPK:CIOXY, 30-year Financials) appears 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 $0.67208 per share and the market cap of $1.8 billion, Cielo SA stock is estimated to be possible value trap. GF Value for Cielo SA is shown in the chart below.
The reason we think that Cielo SA 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, Cielo SA has an Altman Z-score of 0.36, 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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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Cielo SA has a cash-to-debt ratio of 0.42, which which ranks worse than 84% of the companies in Software industry. The overall financial strength of Cielo SA is 4 out of 10, which indicates that the financial strength of Cielo SA is poor. This is the debt and cash of Cielo SA over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Cielo SA has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $2.2 billion and earnings of $0.035 a share. Its operating margin of 7.97% in the middle range of the companies in Software industry. Overall, GuruFocus ranks Cielo SA's profitability as fair. This is the revenue and net income of Cielo SA 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 Cielo SA is -1.2%, which ranks worse than 73% of the companies in Software industry. The 3-year average EBITDA growth rate is -30.6%, which ranks in the bottom 10% of the companies in Software industry.
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, Cielo SA's return on invested capital is 2.96, and its cost of capital is 5.60. The historical ROIC vs WACC comparison of Cielo SA is shown below:
In summary, The stock of Cielo SA (OTCPK:CIOXY, 30-year Financials) is believed to be possible value trap. The company's financial condition is poor and its profitability is fair. Its growth ranks in the bottom 10% of the companies in Software industry. To learn more about Cielo SA stock, you can check out its 30-year Financials here.
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