For investors aiming to construct a portfolio using value investing principles, the central method requires finding companies selling for less than their true value. This structured method, established by Benjamin Graham and used by Warren Buffett, looks for stocks where the market price is lower than an estimated calculation of the business's real worth. A vital step in this method is confirming a low price is not a "value trap"—a low-priced stock with a clear cause—by also reviewing the company's basic financial condition, earnings capability, and potential for expansion. By pairing a good price with sound basics, investors try to establish a "margin of safety" for their capital.
A recent search using this thinking, applying ChartMill's fundamental ratings to select for stocks with good valuation scores together with acceptable scores for profitability, condition, and expansion, identified NetEase Inc-ADR (NASDAQ:NTES). The Chinese technology and entertainment company, most recognized for its online games and services, seems to offer a noteworthy case for more study from a value viewpoint.
Valuation: A Price Lower Than the Industry Average
The most direct draw for a value investor is the stock's price assessment. NetEase's present numbers indicate it is priced cautiously compared to both its field and the wider market.
- Price-to-Earnings (P/E) Ratio: At 14.42, NTES's P/E ratio is much lower than the S&P 500 average of 28.41. More notably, it is less expensive than almost 89% of similar companies in the Entertainment field, where the average P/E is above 42.
- Forward P/E Ratio: Looking forward, the situation stays comparable. With a forward P/E of 13.50, the stock is priced more affordably than 90% of its field rivals and notably below the S&P 500's forward average.
- Price-to-Free-Cash-Flow: This is a especially good point. Based on this ratio, NetEase is priced more attractively than 92.5% of its field, signaling the market could be setting a low value on the large cash the business produces.
For a value investor, these numbers are the initial step. They signal the market could be valuing NTES at a point that does not completely match its business results, forming a possible difference between price and true value.
Financial Health: A Strong Balance Sheet
A low price assessment loses its attraction if the company carries heavy debt or has cash flow problems. Here, NetEase's financial condition offers a solid base, reducing the danger of a value trap. The company's balance sheet is very strong.
- Very Little Debt: NetEase functions with a very low Debt-to-Equity ratio of 0.05, signaling very little use of debt funding. Its debt is only a small part of its yearly free cash flow, meaning it could pay off all its debts in a short time.
- Good Liquidity: The company's liquidity ratios are excellent. With a Current Ratio of 3.42 and a Quick Ratio of 3.41, it holds more than sufficient short-term resources to meet its near-term responsibilities. These ratios place in the high group of its field.
- Actions Good for Shareholders: The company has been lowering its count of shares available over recent years, an action that raises the ownership share and possible earnings per share for current investors.
This excellent financial condition gives the steadiness value investors look for. It means the company is in a good position to handle economic declines, put money into new projects, and give capital back to shareholders without money worries.
Profitability: High-Quality Earnings Ability
Value investing is not only about purchasing inexpensive stocks; it is about purchasing sound companies at a lower price. NetEase's earnings profile confirms it is a high-quality business. Its capability to produce returns on capital is a main sign of a lasting competitive edge.
- Excellent Returns: The company's Return on Invested Capital (ROIC) of 17.58% and Return on Equity (ROE) of 23.22% are some of the best in its field, doing better than over 90% of similar companies. This shows management is very good at using capital to create profits.
- Strong Margins: NetEase keeps notable profit margins, with an Operating Margin of 31.60% and a Net Profit Margin of 32.45%. These are top numbers within the entertainment sector, suggesting good price control and operational effectiveness.
- Steady Cash Production: The company has reported positive earnings and operating cash flow for at least five straight years, showing a dependable and profitable business model.
Strong, steady profitability is essential for the value argument. It supports the calculation of true value and raises the chance that the market will in time acknowledge and revalue the company's earnings capability.
Growth and Dividend: A Mixed Profile
While strict value stocks occasionally lack expansion, NetEase offers a mixed profile. Its past expansion has been good, and it adds to this with a policy good for shareholders regarding dividends.
- Previous Growth: Over the last several years, the company has provided good yearly growth in Earnings Per Share (about 17.5%) and Revenue (over 12%). This past performance gives background for its present price assessment.
- Income Element: With a dividend yield of about 2.3%, NTES gives an income return—a feature often liked by value investors. The payout ratio is a maintainable 36% of earnings, and the company has a dependable history of paying dividends for more than ten years.
- Future Points: It is important to see that analyst projections point to a possible reduction in EPS expansion in the coming period, which is an element to consider. However, revenue is still expected to grow at a good rate.
For a value method, the existence of a maintainable dividend and a history of expansion can be appealing. The dividend gives a return while waiting for price increase, and past expansion helps support the company's true value.
Conclusion: A Candidate for the Value Watchlist
NetEase Inc-ADR offers a detailed case for investors using a value-focused filter. It sells at a price discount to both the market and its field, has a very strong balance sheet that gives a large margin of safety, and has profitability numbers that are top-level. While future earnings expansion faces some queries, its mix of financial strength, high returns on capital, and shareholder returns through dividends and buybacks fits well with the ideas of looking for quality businesses at sensible prices.
This review of NTES came from a methodical hunt for acceptable value stocks. You can examine other companies that passed similar basic filters using this Decent Value Stocks screen.
Disclaimer: This article is for information only and does not make up financial guidance, a suggestion to purchase or sell any security, or a support of any investment plan. The review is based on data and ratings given by ChartMill, and investors should do their own complete study, thinking about their personal money situation and risk comfort, before making any investment choices. You can see the full basic analysis for NTES here.
