For investors looking to find opportunities where the market price may not fully show a company's actual value, a systematic screening method can be a useful beginning. One method is to look for companies that show a good basic valuation, trading at a lower price compared to their financial condition and earnings ability, while also keeping good operational condition, earnings, and expansion. This fits with main value investing ideas, which concentrate on finding undervalued securities by measuring their market price against a determined inherent value, always with a buffer for safety. A stock that rates well on valuation measures, but also shows good financial condition and steady earnings, may be an interesting prospect for more study by investors focused on value.
NetEase Inc-ADR (NASDAQ:NTES), a top Chinese internet technology company mainly recognized for its online games and value-added services, recently appeared through such a "Decent Value" screen. The screen selected stocks with a ChartMill Valuation Rating higher than 7, along with good ratings in earnings, financial condition, and expansion. NetEase's basic profile suggests it may deserve more attention from investors curious about this method.
Valuation: Trading at a Lower Price
The central part of the screening idea is a good valuation, and NetEase's measures show it is priced cautiously relative to both its field and the wider market. For value investors, a low purchase price compared to earnings and cash flow is important as it supplies the "buffer for safety" Benjamin Graham supported.
- Price-to-Earnings (P/E) Ratio: At 13.89, NetEase's P/E ratio is much lower than the S&P 500 average of 27.95. Inside its own Entertainment field, where the average P/E is above 42, NetEase costs less than 91% of similar companies.
- Forward P/E and Cash Flow: The valuation view stays interesting looking forward. Its Price/Forward Earnings ratio of 12.58 is also below market and field averages. Also, based on its Price/Free Cash Flow ratio, the company is valued lower than 91% of its field competitors.
- Enterprise Value (EV) to EBITDA: This measure, which includes debt, also points to a good price. NetEase's EV/EBITDA ratio shows it costs less than 87% of the companies in its field.
This combined information forms a view of a company whose market price seems separate from its earnings ability, a main requirement value investors seek.
Financial Health: A Strong Balance Sheet
A low valuation by itself is not sufficient; a company must also be financially stable to avoid the poor "value trap." NetEase's financial condition rating of 8 out of 10 shows a very strong balance sheet, which lowers risk for investors.
- Very Little Debt Use: The company has a very small Debt-to-Equity ratio of 0.04, showing it does not rely on debt financing and does better than almost 70% of its field peers.
- Very Good Liquidity: NetEase has good liquidity with a Current Ratio of 3.45 and a Quick Ratio of 3.44, indicating it has enough resources to cover short-term needs. These ratios put it in the best group of its field.
- Good Cash Production: Maybe most notably, its Debt-to-Free Cash Flow ratio is only 0.13, meaning it could pay off all its debt with less than two months of its cash flow. This is a very good position that does better than almost 90% of field peers.
This strong financial situation gives stability and options, letting the company handle economic declines and put money into future expansion without financial pressure.
Profitability: High and Getting Better Margins
Value investing is not only about buying low-cost stocks; it is about buying good businesses at a lower price. NetEase's earnings rating of 9 out of 10 confirms it is a very efficient and profitable company.
- Field-Best Margins: The company's Profit Margin of 29.98% and Operating Margin of 31.82% are some of the best in the field, doing better than 96% and 98% of peers, in order.
- Steady and Increasing Returns: NetEase has been profitable with positive operating cash flow for at least the last five years. Its Return on Assets (15.25%), Return on Equity (21.06%), and Return on Invested Capital (17.36%) all rank in the top 10% of its field.
- Good Direction: Importantly, these high margins have been getting better over recent years, suggesting good operations and pricing ability rather than no change.
This degree of earnings is necessary for the value argument, as it confirms the company's inherent earning ability and supports the idea that the current market valuation may be too low.
Growth: A Steady Driver
While not a very high-expansion stock, NetEase shows a steady and good expansion profile that fits with its value traits. A value stock with no expansion can stay low-cost forever, but one with steady expansion has a reason for price increase.
- Good Past Expansion: Over the last several years, the company has reached an average yearly EPS expansion of 21.29% and Revenue expansion of 8.86%.
- Good Future View: Experts think this movement will continue, with expectations for average yearly EPS expansion of 9.86% and Revenue expansion of 8.25% in the next years.
- Maintainable Model: This expansion, while slowing from past highs, seems maintainable and is pushed by a central gaming business that creates large cash flow.
For a value investor, this steady expansion helps close the distance between the current low valuation and the possibility for future price recognition by the market.
Conclusion and More Study
NetEase Inc-ADR shows an interesting profile for investors using a systematic value method. It trades at a clear discount to its field and the market, has a very strong balance sheet that reduces possible loss, and creates very high and improving profits. Along with a steady expansion view, it avoids the problems of a pure "value trap." The mix of these things, good valuation, condition, earnings, and good expansion, is exactly what screens like the "Decent Value" filter are made to find.
This study of NetEase is based on one screening result. Investors curious about finding other companies that fit a similar profile of good basics paired with good valuations can look at the Decent Value Stocks screen on ChartMill for more possible ideas. A closer look at NetEase's full fundamental analysis report is also suggested to check all basic measures and field comparisons.
Disclaimer: This article is for information and learning only and does not form a suggestion to buy, sell, or keep any security. It is not meant as investment guidance of any kind. All investment choices include risk, and readers should do their own complete study and talk with a qualified financial advisor before making any investment choices.