The Capita (LSE:CPI) share price is down over 95% from its high. So, I’m wondering whether this presents an opportunity for me or not.
To find out, I took a close look at the company’s operations and financial statements. Here’s what I discovered to inform my decision.
The risks I see
Capita shares really started to crash in 2016. This was largely due to it reporting a net loss of £58m for that year. In 2017, the firm reported even worse negative earnings of £117m.
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The company’s revenue has also decreased from $4.7bn in 2015 to £3bn for the last 12 months. Therefore, it’s safe to say it’s not growing!
In April 2023, Capita admitted that it had client and staff data stolen in a cyber attack, thought to cost the firm up to £25m. This came at a time when it had lost £68m for the first half of that year.
To recover from such an incident takes more than just cash, however. It also takes reputation salvaging, particularly over its cyber security approach. The event may have also affected investor sentiment over its shares for the worse in the long term.
The valuation
Capita has a price-to-earnings (P/E) ratio of around just 3.4 at the moment. That ratio is very competitive with the wider business services industry, where the median P/E ratio is around 17.
Over the last 10 years, Capita had a P/E ratio of around 15. Therefore, it’s also cheap compared to past valuations.
So, does this mean the shares are worth me buying? I would say not necessarily. The reason is that sometimes a P/E ratio can be very low because investors at large have lost faith in the company.
With Captia’s revenues so steeply in decline and its earnings results quite volatile, I’m hesitant to see this as a viable value investment for me.
Maybe a turnaround opportunity
While I don’t think the shares look like the most compelling investment at this time, even given the lower-than-usual valuation, the company is restructuring in an effort to strengthen its operations and financial results.
Following its transformation completed in 2021, notable results included improving revenue, turning a previous year’s loss into a profit, and achieving positive free cash flow. Also, it reported increased customer and employee satisfaction.
Therefore, there’s evidence to suggest that the company could be able to generate better results from here on out. However, it’s not guaranteed by any means, and I think there might be much more reliable investments for me to consider elsewhere.
Not on my watchlist
Capita isn’t a perfect business, and the problems it has faced in the past and its long-term revenue trajectory make me sceptical about becoming a shareholder.
Warren Buffett taught me from his public speeches that investing isn’t just about value. He says it’s also about buying a portion of great businesses. Capita doesn’t seem to fit the latter description for me, so I’m passing on the shares, even with the low valuation at the moment.
