The Woodbois (LSE: WBI) share price briefly hit 9.4p on 5 March. As I write, it’s at 6.2p. So it’s fallen 36% in a couple of weeks. Are the shares now good value? I’m looking at that today, to help me decide whether to buy.
Small companies, with prospects of growing into something bigger, present investors with a problem. It can be very difficult to put a meaningful valuation on them.
The first measure most investors see is the price-to-earnings ratio, or P/E. All things being equal, lower is better. But with growth stocks, the company is often not yet in profit, and has no earnings from which to calculate a P/E.
Low Woodbois P/E
Fortunately, Woodbois posted a profit for 2021, with earnings of 3.65 cents per share. With the current Woodbois share price, that gives us a P/E of 2.1. The long-term average for the FTSE 100 is around 15. On that comparison, Woodbois looks super cheap.
We often actually see a large P/E when earnings first turn positive. If earnings rise in the coming years as expected, the P/E will fall to something sustainable.
So why is the Woodbois valuation so apparently low? I need to dig deeper. Woodbois reported a profit before tax of $90.7m, which looks impressive. But there are contributions there which do not relate to actual cash. For example, there’s a gain on the value of biological assets of $4.3m.
Bargain purchase
Then there’s a big $88.3m profit recorded as a ‘gain on bargain purchase’ from the acquisition of a company owning timber concessions in Gabon. It’s down to changes in accounting standards, so it represents no cash income. The new acreage generated no sales in 2021.
There are more items not related to actual cash income. But if we adjust for only these two, that pre-tax profit disappears and turns into an underlying loss.
So there’s no underlying EPS after all. And that apparently super-low P/E valuation evaporates.
I wanted to stress this particular valuation measure because it is very commonly used, and it shows in financial summaries everywhere. But at this stage, investors can easily mislead themselves if they place any importance on it.
Other measures?
What else can we use to put a valuation on the Woodbois share price? With no profits, investors often use the price-to-sales ratio (PSR).
I calculate that at about 8.8, based on 2021 turnover. Again, lower is better, and that looks high to me. If we adjust for debt (which is growing, with new borrowings agreed in 2022), it would rise further.
This measure can be misleading too, especially for a small company that’s growing fast. Who knows what PSR Woodbois will be showing once it starts producing wood from all that new forest? Or when its Carbon Credits business (which recorded a 2021 loss) gets going?
So will I buy? No. Because I have no way to tell whether the current Woodbois share price represents good value. Commonly-used measures appear useless at this stage.