Today we're focusing on DiDi Global, a Chinese technology company whose shares shot up 6.1% to a price of $3.07. Yet they still trade 34.54% below their average target price of $4.69, and most analysts rate the stock as a strong buy.
The company's Earnings per Share (Eps) are -2.8, meaning it essentially has a negative Price to Earnings (P/E) ratio. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead).
Gross profits margins, on the other hand, are calculated on the basis of the company's cost of goods sold (i.e. cost of labor and materials only) subtracted from sales revenues. The extent of gross profit margins implies how much freedom the company has in setting the prices of its products. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost.
In DIDIY's case, the gross profit margins are only 5.4%, which shows that it is operating in a highly competitive market, where it is unable to raise its prices (and thus increase its margins) without losing customers to its competitors.
The revenues and earnings related to sales are only a part of the financial puzzle of large corporations, which have many costs and expenses arising independently form their core business: cost of maintaining debt, rent payments, return on capital investments, depreciation, etc. When all of these separate cash flows are taken into account, we are left with the company's levered free cash flow, which for DiDi Global is -$7,835,602,944.
While a negative cash flow for one or two quarters is not necessarily a sign of financial troubles for DIDIY, a longterm trend of negative or highly erratic cash flow levels may indicate a struggling business or a mismanaged company.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Didi global 's P/B ratio of 0.1 indicates that the market value of the company is less than the value of its assets -- a potential indicator of a very undervalued stock.
Nonetheless, Didi's valuation paints a very mixed picture. Its exceptionally low P/B ratio and analyst consensus of strong upside potential are countered by negative cash flows, low earnings, and razor thin gross margins. We encourage you to do your own research into DIDIY's fundamental values -- especially their trends over time and decide for yourself how you would value this stock.
Thanks for reading. To never miss out on the information you need about today's market movers, subscribe to our free newsletter!
