Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Pan American Silver Corp (PAAS, Financial). The stock, which is currently priced at 14.71, recorded a gain of 5.98% in a day and a 3-month decrease of 6.18%. The stock's fair valuation is $22.59, as indicated by its GF Value.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors: historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.
Potential Risks of Pan American Silver (PAAS, Financial)
However, investors need to consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Pan American Silver should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.91. These indicators suggest that Pan American Silver, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Understanding Altman Z-score
Before delving into the details, let's understand what the Altman Z-score entails. Invented by New York University Professor Edward I. Altman in 1968, the Z-Score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
Company Introduction
Pan American Silver Corp is a mining company principally engaged in the operation and development of, and exploration for, silver and gold-producing properties and assets. Its principal products are silver and gold, although it also produces and sells zinc, lead, and copper. Its operating mines comprise La Colorada, Dolores, Huaron, Morococha, Shahuindo, La Arena, Timmins West, Bell Creek, Manantial Espejo, and San Vicente mines.
Pan American Silver's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of Pan American Silver's Altman Z-score reveals Pan American Silver's financial health may be weak, suggesting possible financial distress:
The Retained Earnings to Total Assets ratio provides insights into a company's capability to reinvest its profits or manage debt. Evaluating Pan American Silver's historical data, 2021: -0.17; 2022: -0.22; 2023: -0.13, we observe a recent decline following an initial increase in this ratio. This downward movement indicates Pan American Silver's diminishing ability to reinvest in its business or effectively manage its debt. Consequently, it exerts a negative impact on its Z-Score.
The EBIT to Total Assets ratio serves as a crucial barometer of a company's operational effectiveness, correlating earnings before interest and taxes (EBIT) to total assets. An analysis of Pan American Silver's EBIT to Total Assets ratio from historical data (2021: 0.11; 2022: 0.01; 2023: -0.03) indicates a descending trend. This reduction suggests that Pan American Silver might not be utilizing its assets to their full potential to generate operational profits, which could be negatively affecting the company's overall Z-score.
Conclusion
Despite its seemingly attractive valuation, the financial indicators suggest that Pan American Silver, with its low Altman Z-score, might be a potential value trap. This underlines the importance of thorough due diligence in investment decision-making. GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen .
This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
