|Market Growth LT||null|
|Market Growth ST||B+|
Investors Betting on a Turnaround Must Be Cautious as Company's Growth Record is Still Very Weak
Zuoan Fashion's sales grew moderately last quarter to $75.22 million, a 13.34% improvement from its sales of $66.37 million reported for the year earlier period. Its 12-month trailing revenue was $0.00 million, which we're unable to compare to 12-month trailing sales from either three or two years ago because of a lack of data. It reported very poor profit growth last quarter relative to the comparable quarter a year earlier, while a lack of sufficient long term data limited our full year long term comparison to two years from the usual three. Zuoan Fashion recently reported that its Third quarter profit grew 1.78% to $14.66 million from a year earlier when it had earned $14.40 million (excluding extraordinary items) in the comparable period; also including last quarter, the company lost/earned $46.85 million in the last 12 months, which cannot be compared to the equivalent period ended either two or three years ago given a lack of necessary data.
The company disappointed investors with a very negative earnings surprise on April 25, 2013, missing analysts' estimates by -16.67%, causing the stock to fall -2.83% in reaction to the news. Such a reaction is not unexpected as this latest report extended a trend of missing earnings estimates, a pattern that usually has an adverse effect on the performance of the stock; the company has now reported earnings that have fallen short of analysts' estimates by an average of -4.28% over the last five quarters.
|Price/Cash Flow Ratio||A|
The Stock's Valuation is Attractive Based on the Company's Overall Financial Strength
Shares of Zuoan Fashion are trading currently at 1.84 times trailing 12-month earnings. This P/E ratio represents a 94.39% discount to the MarketGrader-calculated "optimum" P/E ratio of 32.74, which is based on the company's two-year EPS growth rate. According to this calculation, which looks at the company's growth across rolling 12-month periods, Zuoan Fashion's earnings per share have grown at an impressive annualized rate of 36.01% in the last two years. Assuming this growth rate is sustained in coming quarters, the company's margins may continue to expand if it maintains its current Profitability overall grade. This would bode well for the stock in the future. The stock also trades at 0.00 times forward earnings estimates for the next four quarters, lower than its trailing P/E and the S&P 500 index's forward P/E of 15.20. By placing a lower multiple on the company's future earnings than it does on the market as a whole, investors may see the company as financially strong but with relatively poor growth prospects. This may offer a valuable opportunity for patient investors willing to wait for future earnings reports.
Investors are currently valuing Zuoan Fashion at 0.38 times its total book value per share, which either undervalues the company's ongoing business or anticipates a significant asset write-down. Normally we would calculate the company's price to tangible book value (which includes intangible assets such as goodwill), but in this case Zuoan Fashion didn't report any intangible assets in its most recent balance sheet. Based on the $0.52 in cash flow per share generated by the company in the last twelve months, at the current price of $2.71 the stock trades at 5.18 times cash flow, an attractive valuation considering the strength of its overall fundamentals. Its shares also trade at 0.34 times its trailing 12-month sales, a small 75.80% discount to the Apparel/Footwear industry average price to sales ratio of 1.40. Our final value indicator looks at the relationship between the company's current market capitalization and its operating profits after deducting taxes. By this measure Zuoan Fashion is priced very attractively with a total value of $75.45 million , only 5.02 times higher than its latest quarterly net income plus depreciation.
|Return on Equity||B+|
|Quality of Revenues||A+|
Profitability Record Is Excellent Across the Board Suggesting a Very Well Managed Operation
Zuoan Fashion has a strong 12-month trailing profitability record based on solid returns on shareholder equity, operating margins that exceed its peer group average and a remarkable net profit margin. The $46.85 million net profit earned by the company in the last four quarters was equivalent to 20.99% of total sales. The Apparel/Footwear industry had an average operating margin of 12.27% in the period. The company's operating margin of 28.46% exceeded that average by 119.73%. Based on its trailing 12-month earnings, Zuoan Fashion return on equity of 23.74% is a very strong indicator of profitability and a positive reflection on the company's management efficiency. However, it represents a decline from the year earlier period's return on equity of 25.82%, possibly spelling a slowdown in the company's business.
Despite this moderate downturn the company's leverage is low enough that it could be increased without overburdening the company in order to ensure that current profitanility is sustained. Its total debt is only 0.08 times total equity while long term debt makes up 0.00% of total capital. Zuoan Fashion's core earnings in the last twelve months grew moderately from the twelve months ended a year earlier. The company's EBITDA for the most recent period was $65.31 million, or 0.53% above the $64.96 million earned from its core operations in the prior period. EBITDA is used by MarketGrader to measure the company's true earnings power since it includes interest expenses, income taxes, depreciation and amortization, all non-operating expenses, which are nevertheless accounted for in other parts of our analysis that look at EPS gains and net income.
|Cash Flow Growth||F|
|Debt/Cash Flow Ratio||A+|
|Interest Cov. Capacity||A|
Company's Cash Flow Indicators Are Solid Across the Board but Offer Some Room for Improvement
Zuoan Fashion's cash flow turned negative last quarter, falling to $-26.36 million from the $0.91 million reported in the same quarter a year ealier. ** Even though the company has $16.82 million in total debt, its net debt is virtually zero since it has $136.21 million in cash on hand; and since it generated $20.32 million in earnings before interest, taxes, depreciation and amortization last quarter, it's safe to say its liquidity is remarkable. Therefore the company's debt is not only very manageable with its own cash flow but could be increased if it wanted to pursue strategic growth opportunities. The company also has the ability to enhance shareholder returns through dividends or by repurchasing its own shares, boosting the future value of its earnings. The current amount of cash and equivalents it has on hand is 18.02% higher than a year ago when it had $115.41 million; while in this same period its leverage also increased, with total debt as a percentage of total capital climbing from 6.32% to 7.85% today, the company's cash on hand is still larger than its debt.
An important indicator of management efficiency used by MarketGrader is Economic Value Added, or EVA, which measures each company's true return to shareholders after accounting not only for the cost of running the business (operating costs) but also the cost of the capital it employs. By measuring the real cost of capital, both equity and debt, EVA measures the creation of true economic profit. In this case Zuoan Fashion had $197.33 million in invested capital in its most recent quarter, a combination of both equity and long term debt. However, the company's weighted cost of equity of 0.84% is much larger than the weighted cost of debt, which is 0.00%. When combined, the two result in a total cost of capital of 0.84%, quite low compared to the company's total return on invested capital of 32.20% based on 12-month trailing operating income. The result is an excellent economic value added of 31.36%, a very high return to investors after all capital costs are covered. Zuoan Fashion does not pay a dividend and hasn't done so within at least the last five years.