FibroGen Stock Gives Every Indication Of Being Possible Value Trap

GuruFocus.com
·4 min read

- By GF Value

The stock of FibroGen (NAS:FGEN, 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 $19.42 per share and the market cap of $1.8 billion, FibroGen stock is believed to be possible value trap. GF Value for FibroGen is shown in the chart below.


FibroGen Stock Gives Every Indication Of Being Possible Value Trap
FibroGen Stock Gives Every Indication Of Being Possible Value Trap

The reason we think that FibroGen 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, FibroGen has an Altman Z-score of 1.49, 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.

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. FibroGen has a cash-to-debt ratio of 17.80, which ranks in the middle range of the companies in Biotechnology industry. Based on this, GuruFocus ranks FibroGen's financial strength as 5 out of 10, suggesting fair balance sheet. This is the debt and cash of FibroGen over the past years:

FibroGen Stock Gives Every Indication Of Being Possible Value Trap
FibroGen Stock Gives Every Indication Of Being Possible Value Trap

It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. FibroGen has been profitable 0 over the past 10 years. Over the past twelve months, the company had a revenue of $176.3 million and loss of $2.13 a share. Its operating margin is -108.82%, which ranks in the middle range of the companies in Biotechnology industry. Overall, GuruFocus ranks the profitability of FibroGen at 1 out of 10, which indicates poor profitability. This is the revenue and net income of FibroGen over the past years:

FibroGen Stock Gives Every Indication Of Being Possible Value Trap
FibroGen Stock Gives Every Indication Of Being 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 FibroGen is 3%, which ranks in the middle range of the companies in Biotechnology industry. The 3-year average EBITDA growth rate is -8.5%, which ranks worse than 70% of the companies in Biotechnology industry.

One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average 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 return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, FibroGen's ROIC is -117.89 while its WACC came in at 6.20. The historical ROIC vs WACC comparison of FibroGen is shown below:

FibroGen Stock Gives Every Indication Of Being Possible Value Trap
FibroGen Stock Gives Every Indication Of Being Possible Value Trap

In short, FibroGen (NAS:FGEN, 30-year Financials) stock gives every indication of being possible value trap. The company's financial condition is fair and its profitability is poor. Its growth ranks worse than 70% of the companies in Biotechnology industry. To learn more about FibroGen 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.