Is the Capita share price a value opportunity or a trap I should avoid?

The Capita (LSE:CPI) share worth is down over 95% from its excessive. So, I’m questioning whether or not this presents a chance for me or not.

To seek out out, I took an in depth have a look at the corporate’s operations and monetary statements. Right here’s what I found to tell my resolution.

The dangers I see

Capita shares actually began to crash in 2016. This was largely on account of it reporting a internet lack of £58m for that yr. In 2017, the agency reported even worse adverse earnings of £117m.

The corporate’s income has additionally decreased from $4.7bn in 2015 to £3bn for the final 12 months. Subsequently, it’s protected to say it’s not rising!

In April 2023, Capita admitted that it had shopper and employees knowledge stolen in a cyber assault, thought to price the agency as much as £25m. This got here at a time when it had misplaced £68m for the primary half of that yr.

To get well from such an incident takes extra than simply money, nonetheless. It additionally takes repute salvaging, significantly over its cyber safety strategy. The occasion might have additionally affected investor sentiment over its shares for the more severe in the long run.

The valuation

Capita has a price-to-earnings (P/E) ratio of round simply 3.4 for the time being. That ratio may be very aggressive with the broader enterprise companies trade, the place the median P/E ratio is round 17.

Over the past 10 years, Capita had a P/E ratio of round 15. Subsequently, it’s additionally low-cost in comparison with previous valuations.

So, does this imply the shares are price me shopping for? I’d say not essentially. The reason being that generally a P/E ratio could be very low as a result of traders at giant have misplaced religion within the firm.

With Captia’s revenues so steeply in decline and its earnings outcomes fairly unstable, I’m hesitant to see this as a viable worth funding for me.

Perhaps a turnaround alternative

Whereas I don’t suppose the shares seem like probably the most compelling funding presently, even given the lower-than-usual valuation, the corporate is restructuring in an effort to strengthen its operations and monetary outcomes.

Following its transformation accomplished in 2021, notable outcomes included bettering income, turning a earlier yr’s loss right into a revenue, and attaining optimistic free money circulate. Additionally, it reported elevated buyer and worker satisfaction.

Subsequently, there’s proof to counsel that the corporate may be capable of generate higher outcomes from right here on out. Nonetheless, it’s not assured by any means, and I feel there could be far more dependable investments for me to think about elsewhere.

Not on my watchlist

Capita isn’t an ideal enterprise, and the issues it has confronted previously and its long-term income trajectory make me sceptical about changing into a shareholder.

Warren Buffett taught me from his public speeches that investing isn’t nearly worth. He says it’s additionally about shopping for a portion of nice companies. Capita doesn’t appear to suit the latter description for me, so I’m passing on the shares, even with the low valuation for the time being.