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business newsCan Chinese Biotech Appropriately Diversify Your Portfolio?
WuXi PharmaTech presents an interesting case to investors from a fundamental standpoint.
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WuXi PharmaTech (WX) is a small-cap pharmaceutical firm based in China. WuXi focuses on outsourcing research and development work in China and the US. While its business model may be of interest to some investors, certain risks must first be understood.
In recent months many Chinese companies, like RINO International and Sino-Forest, have seen their share prices collapse after facing fraud allegations. WuXi could run an honest operation and report its finances properly, but the recent trends should be kept in mind. Foreign stocks like WuXi also require a thorough understanding of foreign markets' internal and external dynamics. Moreover, while US healthcare is complicated in and of itself, the Chinese biopharma space can be even more difficult to understand.
Based on its financial reporting, WuXi has a profitable track record. The company's cash on hand has been steadily increasing over the last three years. From 2009 to 2010 alone, its cash position increased from $81 million to $115 million. Its PP&E assets have also increased at a rapid rate, adding nearly $50 million annually for the last few years. Accordingly, total assets have grown over time.
WuXi's liabilities have also shown improvements. From 2009 to 2010, current liabilities decreased from $80 million to $60 million. Non-current liabilities also shrunk from 2009 to 2010. Shareholders' equity increased accordingly, posting its first positive retained earnings number. Paid-in capital also increased slightly.
Investors can also use various financial metrics to determine the company's value. WuXi appears to be undervalued considering comparable trading ratios. Price/earnings, price/book value, and price/sales are all low compared to its competitors. Price/earnings, which is very common for investors to use, is 5.2 for WuXi, while competitors' average ratio is 22.5.
Another common ratio for investors to consider is the return on equity, which is fairly high for WuXi. The company boasts a 25.8% annualized return on equity, while competitors report an 11.1% return on average. Lastly, WuXi reports a debt/equity ratio of nearly 0 while its competitors report a ratio of 6.1.
Other growth measures that investors commonly use include revenue growth and EPS growth, which have been positive over the last three years for WuXi. Its revenue has grown by about 35% and its EPS has grown about 44% over that time. Moreover, the firm's operating and net margins are better than those of its competitors.
WuXi PharmaTech presents an interesting case to investors from a fundamental standpoint. Its financial statements and financial metrics show positive growth over time, and the stock may continue the trend into the future. Investors need to be aware of the risks involved with foreign stocks, especially those that have small market capitalizations and are involved in volatile industries.. The stock has decreased over the last three months from about $18 to about $12, which may be an artifact of overall market sentiment.
Editor's Note: This article by Abe Raymond originally published on Benzinga.
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