Today shares of Cidara Therapeutics have fallen -12.93%, to a price of $1.01. Since it has an average rating of buy, many investors will be using today as an opportunity to buy the dip. But what if the stock is overvalued? Don't blindly trust analyst ratings before looking at the fundamentals yourself!
The first step in determining whether a stock is overvalued is to check its price to book (P/B) ratio. This is perhaps the most basic measure of a company's valuation, which is its market value divided by its book value. Book value refers to the sum of all of the company's assets minus its liabilities -- you can also think of it as the company's liquidation value.
Traditionally, value investors would look for companies with a ratio of less than 1 (meaning that the market value was smaller than the company's book value), but such opportunities are very rare these days. So we tend to look for company's whose valuations are less than their sector and market average. The P/B ratio for Cidara Therapeutics is 3.949, compared to its sector average of 4.16 and the S&P 500's average P/B of 2.95.
Modernly, the most common metric for valuing a company is its Price to Earnings (P/E) ratio. It's simply today's stock price of 1.01 divided by either its trailing or forward earnings, which for Cidara Therapeutics are $-0.34 and $-0.4 respectively. Based on these values, the company's trailing P/E ratio is -2.97 and its forward P/E ratio is -2.52. By way of comparison, the average P/E ratio of the Health Care sector is 24.45 and the average P/E ratio of the S&P 500 is 15.97.
Lastly, we consider Cidara Therapeutics's 2022 free cash flow of $-28.5 Million This is the sum of all of its incoming and outgoing cash flows -- including those that are unrelated to its core business, such as rent, legal costs, income from investments, debt payments, etc. A negative cash flow for a single quarter is not a particularly serious issue for a company that does not pay a dividend. But if the cash flows are negative or erratic over several years, the company may be in trouble.
Despite the quantitative evidence that Cidara Therapeutics is overvalued, analysts are mostly bullish on the stock. What do they know about the stock's that trumps its weak valuation and growth potential? We will look into this question in a future report focusing on qualitative factors that might be favoring CDTX.
