I think the Lloyds share price could be a value trap

Our author loves finding value opportunities. However, he thinks that the Lloyds share price could get him stuck at a low price if he makes an investment.

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The Lloyds (LSE:LLOY) share price is down over 90% from its all-time high. While this might seem like an appealing time to make an investment, I’m not so sure.

Lloyds is famous as a banking group, and it dates back to 1765. It was one of the first banks in the world.

The share price saw its prime in the 1990s. Yet, since then, although the share price increased at moments, it generally headed downward.

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The financial picture

Interestingly, while total revenue increased quite significantly from £17bn in 2016 to around £18.5bn in 2017, it’s dipped since due to the pandemic and was reported at £18bn in 2022.

Net income, on the other hand, was £2bn in 2016 but has risen to £5.5bn in 2022. That’s despite a significant hit from the pandemic around 2019, too.

To me, that’s a good sign in some ways. Although the company has struggled with revenue growth, its internal management has allowed for growing net income.

Source: TradingView

The company also has a dividend yield of 5.4%, which could be attractive if I were focused on a passive income.

However, I do think it’s important for me to be aware of how well the company is managing its debt. And Lloyds seems to have quite a lot of it.

For example, it has an equity-to-asset ratio of 0.05. What this means is that 95% of the company’s assets are balanced by debt.

That’s quite severe, in my opinion. Based on the facts, that’s is in the bottom 15% of 1,473 companies in the banking industry.

Understanding the value

It seems intuitive to me that the company’s price-to-earnings (P/E) ratio would be low right now. That’s because of the historically low share price. And my hunch was right, at the moment, the ratio is around five.

But comparing that to other banking shares is important to me. NatWest has a P/E ratio of around five, and Virgin Money UK has a P/E ratio of around 12. The worldwide banking average is a P/E ratio of nine.

Personally, I think the company is definitely cheap, but I worry that it deserves to be so. For that reason, I think it could be a value trap.

My take

I’m concerned that the company won’t be able to get its revenue growth back on track, so I’m definitely hesitant to buy the shares.

One of the reasons I don’t like buying value shares that aren’t great businesses is that sometimes they don’t live up to my expectations of rising to ‘fair value’.

‘Fair value’ is an estimate of what analysts think a company is worth based on future earnings, discounted back to present-day value.

I’d rather buy the shares of companies that have growth momentum, too. That way, I’m not just trading on price but also buying a great business, the Foolish way.

So, this one’s not even going on my watchlist.

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Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Oliver Rodzianko has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Like buying £1 for 51p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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