Cronos Group Stock Is Estimated To Be Possible Value Trap

GuruFocus.com
·4 min read

- By GF Value

The stock of Cronos Group (NAS:CRON, 30-year Financials) is estimated 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 $9.16 per share and the market cap of $3.3 billion, Cronos Group stock gives every indication of being possible value trap. GF Value for Cronos Group is shown in the chart below.


Cronos Group Stock Is Estimated To Be Possible Value Trap
Cronos Group Stock Is Estimated To Be Possible Value Trap

The reason we think that Cronos Group 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.

Link: These companies may deliever higher future returns at reduced risk.

Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Cronos Group has a cash-to-debt ratio of 131.42, which ranks better than 88% of the companies in Drug Manufacturers industry. Based on this, GuruFocus ranks Cronos Group's financial strength as 8 out of 10, suggesting strong balance sheet. This is the debt and cash of Cronos Group over the past years:

Cronos Group Stock Is Estimated To Be Possible Value Trap
Cronos Group Stock Is Estimated To Be Possible Value Trap

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. Cronos Group has been profitable 2 years over the past 10 years. During the past 12 months, the company had revenues of $46.7 million and loss of $0.24 a share. Its operating margin of -385.79% in the bottom 10% of the companies in Drug Manufacturers industry. Overall, GuruFocus ranks Cronos Group's profitability as poor. This is the revenue and net income of Cronos Group over the past years:

Cronos Group Stock Is Estimated To Be Possible Value Trap
Cronos Group Stock Is Estimated To Be Possible Value Trap

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 Cronos Group is 94.8%, which ranks better than 96% of the companies in Drug Manufacturers industry. The 3-year average EBITDA growth rate is -83.5%, which ranks in the bottom 10% of the companies in Drug Manufacturers industry.

Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). 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. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Cronos Group's ROIC was -25.63, while its WACC came in at 10.80. The historical ROIC vs WACC comparison of Cronos Group is shown below:

Cronos Group Stock Is Estimated To Be Possible Value Trap
Cronos Group Stock Is Estimated To Be Possible Value Trap

Overall, the stock of Cronos Group (NAS:CRON, 30-year Financials) is estimated to be possible value trap. The company's financial condition is strong and its profitability is poor. Its growth ranks in the bottom 10% of the companies in Drug Manufacturers industry. To learn more about Cronos Group stock, you can check out its 30-year Financials here.

To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.

This article first appeared on GuruFocus.

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