The timber company Woodbois (LSE: WBI) has been a disappointing performer in the long term. In the past year, the Woodbois share price has lost a fifth of its value. Over five years, the performance has been even worse, with the shares falling by 77%.
Against that, though, what about the company’s business performance? After all, its half-year results contained lot of positive news. Revenues grew 38% compared to the same period a year ago. The firm also recorded its first ever operating profit.
So while the business trend may be improving, I do still have some valuation concerns about the Woodbois share price. They are part of the reason I do not plan to invest in the firm.
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The Woodbois share price and earnings
Many investors value a company’s shares by using a method involving the price-to-earnings (P/E) ratio. In short, the lower the P/E ratio, the cheaper the company seems to be.
Looking at Woodbois’ P/E ratio, it is barely above one. That looks incredibly low. In theory, someone could borrow the money now to buy the company, use earnings from the next year and a bit to pay back the loan, and then own it outright without having dipped into their own pocket.
Earnings and repeatability
In practice, though, one mistake some investors make is looking at headline earnings rather than digging into the quality or repeatability of those earnings.
Earnings are just an accounting concept. They do not show the money coming in or leaving a business, like its cash flow statement does. So while Woodbois’ earnings last year were impressive, they largely reflected a one-off accounting treatment of some woodland. That helps explain why Woodbois reported earnings of $90m despite only having revenue of $17m.
There is nothing wrong with that accounting practice. But it does mean that applying a P/E ratio to the Woodbois share price does not help me arrive at a helpful valuation. Last year’s earnings reflected that one-off accounting treatment rather than a stream of profits likely to recur within the business. So, to value Woodbois, I feel I need to look beyond its most recent earnings or a P/E ratio.
Long-term trend
Another concern I have about the Woodbois share price is its long-term trend. Investors have lost over three-quarters of the value of their holdings in five years.
That is not necessarily a guide to future performance. But I think it reflects the fact that, for a fair bit of its time as a listed company, investor hopes for the Woodbois business model has run ahead of its actual worth as a business. Carbon offsetting could be a big business for the company in future, for example. But for now, I feel its profit potential for Woodbois remains unproven.
The business does seem to be performing better, which could signal a change of fortunes. Nonetheless, the current share price equates to a market capitalisation of £73m. That valuation looks high to me for a firm that reported an operating profit in the first half of around £13,000.
For the Woodbois story to excite me as an investor, I would like to see much more evidence of sustained profitability. Until then, I fear the long-term trend of shareholder value destruction could continue, so I will not be investing.
