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- By GF Value

The stock of Editas Medicine (NAS:EDIT, 30-year Financials) shows every sign of being possible value trap, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $40.5 per share and the market cap of $2.7 billion, Editas Medicine stock gives every indication of being possible value trap. GF Value for Editas Medicine is shown in the chart below.

• Warning! GuruFocus has detected 3 Warning Signs with EDIT. Click here to check it out.

• EDIT 15-Year Financial Data

• The intrinsic value of EDIT

• Peter Lynch Chart of EDIT

The reason we think that Editas Medicine stock might be a value trap is because its Piotroski F-score is only 3, out of the total of 9. Such a low Piotroski F-score indicates the company is getting worse in multiple aspects in the areas of profitability, funding and efficiency. In this case, investors should look beyond the low valuation of the company and make sure it has no long-term risks. To learn more about how the Piotroski F-score measures the business trend of a company, please go here.

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It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Editas Medicine has a cash-to-debt ratio of 15.39, which is in the middle range of the companies in Biotechnology industry. The overall financial strength of Editas Medicine is 6 out of 10, which indicates that the financial strength of Editas Medicine is fair. This is the debt and cash of Editas Medicine over the past years:

It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Editas Medicine has been profitable 0 over the past 10 years. Over the past twelve months, the company had a revenue of $90.7 million and loss of $2 a share. Its operating margin is -148.61%, which ranks in the middle range of the companies in Biotechnology industry. Overall, GuruFocus ranks the profitability of Editas Medicine at 2 out of 10, which indicates poor profitability. This is the revenue and net income of Editas Medicine over the past years:

One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Editas Medicine is 65.7%, which ranks better than 89% of the companies in Biotechnology industry. The 3-year average EBITDA growth is 8.3%, which ranks in the middle range of the companies in Biotechnology industry.

One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Editas Medicine's ROIC is -114.03 while its WACC came in at 12.61. The historical ROIC vs WACC comparison of Editas Medicine is shown below:

In closing, The stock of Editas Medicine (NAS:EDIT, 30-year Financials) appears to be possible value trap. The company's financial condition is fair and its profitability is poor. Its growth ranks in the middle range of the companies in Biotechnology industry. To learn more about Editas Medicine stock, you can check out its 30-year Financials here.

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This article first appeared on GuruFocus.