Our task today will be to comprehensively evaluate recent data for Square, Inc. (SQ) to determine whether or not we have something approaching a “value” in the market.
In the most basic sense, the “value investing” methodology really has its roots in the college textbook “Security Analysis”, which was published six decades ago by Graham and Dodd. But today, the term “value investing” is generally applied to any approach that focuses first and foremost on the concept of valuation, seeking out viable companies that are “cheap” based on various measures.
In this case, the company’s forward price-to-earnings ratio — perhaps the most common default measure of valuation — is currently at 56.34. That’s based on estimates looking for earnings of 0.25 coming up the pike in the company’s next financial report card.
That said, we all know that the forward data on a stock like this requires faith in those making projections: the analysts. Currently, the forward projections are driven by a group of 35 analysts. And, naturally, no one knows if those 35 folks are way off base for some reason. It’s happened before. That’s why some investing legends only trust the trailing earnings data.
However, to get a real sense of how this measures up, we will need to dig deeper. Benjamin Graham, the legendary value investor and one of the authors of the seminal text mentioned above, commonly relied on a simple formula for more aggressive investments: Current assets should be at least 1½ times current liabilities, debt should not be more than 110% of net current assets, there should be some level of dividend payments, and the Price-to-book-value ratio should be less than 120% of net tangible assets.
With that in mind, let’s see how Square, Inc stacks up to this challenge.
First off, the company’s current ratio (the ration of current assets to current liabilities) is sitting at 1.49. Remember, according to Graham, that should be at least 1.5. Next, we can see debt-to-equity at 89.17. How about price-to-book ratio? Right now, it clocks in at 22.10.
That should speak to what Graham might say if he came across this stock at its current price. But there are certainly other factors involved in the concept of value in today’s market that should be appreciated.
For example, Square, Inc. (SQ) has managed to generate a return on its assets of -0.47%. That has been achieved through operating margins of -0.79%. Naturally, in the most basic sense, the concept of value is rooted in an ability to generate returns on invested capital. It is fundamentally about gaining access to the machine that has demonstrated its capability to generate those returns, and to do so for a price that is beneath what it is truly worth.
Perhaps the final measure that speaks to this idea is what investors currently have to pay for the company’s sales. In this case, the company’s price-to-sales ratio currently clocks in at 6.52.