The stock of Manila Electric Co (OTCPK:MAEOY, 30-year Financials) shows every sign 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 $10.1315 per share and the market cap of $5.7 billion, Manila Electric Co stock is believed to be possible value trap. GF Value for Manila Electric Co is shown in the chart below.

Manila Electric Co GF Value Chart

The reason we think that Manila Electric Co stock might be a value trap is because Manila Electric Co has an Altman Z-score of 1.81, 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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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. Manila Electric Co has a cash-to-debt ratio of 1.02, which ranks better than 78% of the companies in the industry of Utilities – Independent Power Producers. Based on this, GuruFocus ranks Manila Electric Co’s financial strength as 6 out of 10, suggesting fair balance sheet. This is the debt and cash of Manila Electric Co over the past years:

debt and cash

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. Manila Electric Co has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $6 billion and earnings of $0.592 a share. Its operating margin is 7.44%, which ranks worse than 66% of the companies in the industry of Utilities – Independent Power Producers. Overall, the profitability of Manila Electric Co is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Manila Electric Co over the past years:

Revnue and Net Income

One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Manila Electric Co is 7.4%, which ranks in the middle range of the companies in the industry of Utilities – Independent Power Producers. The 3-year average EBITDA growth is 6.1%, which ranks in the middle range of the companies in the industry of Utilities – Independent Power Producers.

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, Manila Electric Co’s return on invested capital is 5.26, and its cost of capital is 6.79. The historical ROIC vs WACC comparison of Manila Electric Co is shown below:

ROIC vs WACC

In summary, the stock of Manila Electric Co (OTCPK:MAEOY, 30-year Financials) is estimated to be possible value trap. The company’s financial condition is fair and its profitability is fair. Its growth ranks in the middle range of the companies in the industry of Utilities – Independent Power Producers. To learn more about Manila Electric Co stock, you can check out its 30-year Financials here.

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