Perdoceo Education Stock Appears To Be Possible Value Trap
- By GF Value
The stock of Perdoceo Education (NAS:PRDO, 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 $12.2 per share and the market cap of $859.4 million, Perdoceo Education stock is estimated to be possible value trap. GF Value for Perdoceo Education is shown in the chart below.
Warning! GuruFocus has detected 2 Warning Sign with PRDO. Click here to check it out.
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The reason we think that Perdoceo Education stock might be a value trap is because
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Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Perdoceo Education has a cash-to-debt ratio of 8.92, which is better than 77% of the companies in Education industry. GuruFocus ranks the overall financial strength of Perdoceo Education at 9 out of 10, which indicates that the financial strength of Perdoceo Education is strong. This is the debt and cash of Perdoceo Education over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Perdoceo Education has been profitable 5 over the past 10 years. Over the past twelve months, the company had a revenue of $700 million and earnings of $1.77 a share. Its operating margin is 27.81%, which ranks better than 83% of the companies in Education industry. Overall, the profitability of Perdoceo Education is ranked 4 out of 10, which indicates poor profitability. This is the revenue and net income of Perdoceo Education over the past years:
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 Perdoceo Education is 3.7%, which ranks in the middle range of the companies in Education industry. The 3-year average EBITDA growth is 45.6%, which ranks better than 86% of the companies in Education 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, Perdoceo Education's ROIC is 53.97 while its WACC came in at 8.90. The historical ROIC vs WACC comparison of Perdoceo Education is shown below:
In summary, Perdoceo Education (NAS:PRDO, 30-year Financials) stock appears to be possible value trap. The company's financial condition is strong and its profitability is poor. Its growth ranks better than 86% of the companies in Education industry. To learn more about Perdoceo Education stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.
