Stock Valuation: Li & Fung Ltd (494)

Name of Company Country of Origin/ Exchange Traded Sector Stock Price
LI & FUNG LTD Hong Kong/
HKSE
Industrials – Business Services – Business Services HKD1.75
@ 29 Sep 2018
COMPANY PROFILE Li & Fung Ltd is a Hong Kong-based global supply chain manager that serves retailers globally with sourcing and logistics services. The company is organized into two segments, Trading Network and the Logistics Network.

Li & Fung is a Hong Kong-based supply-chain manager that serves retailers globally with sourcing and logistics services. U.S. and European retailers accounted for 66% and 17% of revenue, respectively, in 2017. Founded more than 100 years ago as a trading agent, Li & Fung generated 79% of its operating profit in 2016 from sourcing consumer goods, and the rest from logistics. The firm operates globally, with more than 300 offices and distribution centers in more than 40 countries.

Stock Code 494
Valuation Analysis Below

Li & Fung Price to EBIT

The Price Earnings (PE) Ratio is the most frequently used valuation indicator for a stock. However, there are times when this ratio cannot be used e.g. when the company reports a loss or profit is so minimal that it results in an abnormally high PE Ratio. Or Net Profit After Tax may be volatile and it is better to use Earnings Before Interest and Tax (EBIT) to value the company. We use the PE Band or Price/EBIT Band to show whether a stock is overvalued or undervalued based on its historical valuation.
At the price of HKD1.75 as at 29 Sep 2018, Li & Fung Ltd is trading at a Price to EBIT Ratio of 6.2 times last 12 months earnings.  This is a 42.0% discount to its current fair Price to EBIT Ratio of 10.7 times. (Price based on the fair Price to EBIT Ratio of the company is indicated by the red line.)
Is the stock undervalued? One should not just look at one indicator to determine the fair value of a stock.
ProThinker believes in using a combination of valuation methods to decide whether a stock is over or undervalued? The five ratios we use are Price to Earnings, Price to Sales, Price to Cash Flow, Price to Book and Dividend Yield. We use multiple methods to value a stock because each has its benefits as well as shortcomings. Price to Earnings and Price to Cash Flow Ratios relate stock price to profitability but are meaningless when the comany has negative earnings or cash flows. Price to Sales Ratio is more stable because sales are never negative. However, this does not tell us whether the company is able to sell profitably. Price to Book Ratio gives us an indication as to how much we are paying for the company’s assets but it is not directly related to the company’s profitability. Dividend Yield cannot be used for companies that are paying little to no dividends.
While it is important to value stocks based on multiple valuation methods, this often leads to differing views on valuation. One indicator may suggest that a stock is overvalued while another suggest that it is undervalued. This does not help an investor who needs to make a definite decision whether to buy, hold or sell the stock. That is why we advocate the use of a Composite Valuation Indicator, which is derived from the best combination of the five indicators above. A Composite Valuation Indicator will give you ONE conclusion on whether a stock is under or over valued.
To find out more about our valuation methodology, click here. 
Source of Data: Company description, historical financial statements data and price data are from gurufocus.com or moneycontrol.com. Estimates are from marketscreener.com – Thomson Reuters.
Disclaimer: This report is for information purposes only and should not be considered a solicitation to buy or sell any security. Neither ProThinker nor any other party guarantees its accuracy or makes warranties regarding results from its usage. Redistribution is prohibited without the express written consent of ProThinker. Copyright(c) 2018. All rights reserved.

 

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