To weed out the riskiest stocks, Socit Gnrales analysts have put together an expensivestocks with poor earnings quality screen.
This screen has two main parts. The first is an earnings quality assessment, which looks at ten different earnings quality factors.
These factors are based on the ten most common methods of earnings manipulation, including factors like inventory levels, cash generation and rising levels of receivables.
The second part of the screen is a basic valuation assessment. Companies with the highest valuations but lowest earnings quality make it on to Socit Gnrales naughty list.
All stocks in the FTSE World Developed and FTSE 350 indexes are included in the screen. Here are the UK companies that currently qualify.
Look out below!
Just Eat(LSE: JE) leads the list of expensive stocks with poor quality earnings and its easy to see why.
The company currently trades at an eye-watering forward P/E of 74, which looks expensive, even after factoring in projected earnings growth of 40% this year. Whats more, Just Eat looks expensive on several other metrics, including P/B, price-to-sales, and price-to-free-cash-flow.
In fact, Just Eat is one of the most expensive companies in the technology sector, a sector thats renowned for high valuations.
Poor earnings quality
Cable and Wireless(LSE: CWC) is anther stock investors should stay away from.
Cable is currently trading at a forward P/E of 25.6, a significant premium to the telecoms sector average of 14.7.
Moreover, Cables earnings history over the past few years leaves much to be desired. The companys net profit has fallen 17% since 2010, and operating cash flow has declined by 42%.
Whats even more concerning is the fact that since 2010, Cables net debt has tripled. Return on capital employed has collapsed from 19% to 1% during the same period.
As the worlds leading silver producer,Fresnillos(LSE: FRES) outlook is tied to the silver price. Unfortunately, as the price of precious metals has fallen, Fresnillos income has also collapsed.
Since 2011 Fresnillos net income has declined by 88%. The companys operating cash flow has followed suit and for the past two years, Fresnillos capital spending has exceeded cash generated from operations.
As a result, Fresnillo has been forced to borrow heavily. Since 2011 Fresnillo has gone from reporting a solid cash balance of $685m to net debt of $347m.
Overall, Fresnillo is struggling, and the companys forward P/E of 30.6 hardly seems appropriate.
High dividend risk
Alongside the expensivestocks with poor earnings quality screen,Socit Gnrale also publishes a monthlyhigh dividend risk. This screen seeks to weed out those companies that are likely to cut their dividend payouts in the near future.
EVRAZ(LSE: EVR) is just one of the five UK firms that made it onto the high dividend risk screen this month. Analysts expect the company to offer investors a dividend of 6.9p per share this year, a yield of 4.5%.
According to estimates, this payoutwill be covered three-and-a-half times by earnings per share. However, with net gearing of 284%, EVRAZ should be retaining cash to pay down debt, not distributing valuable profits to investors.
So, there is a chance that the steel maker could be forced to slash its payout to preserve cash in the future.
The four companies above are some of the market’s most risky bets.
If you’re looking for companies with a brighter outlook and steady growth rate,here arefive other companiesthat we believe should have a place in every investorsportfolio.
These five companies have been hand-picked by our analysts and have all the qualities needed to stand the test of time.
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