The Woodbois (LSE: WBI) share price has plunged to a low of 2p. As a result, its price-to-earnings (P/E) ratio is now below one. Having said that, could its current share price entice me to buy its stock, or is it a value trap?
Different branches of income
For those unfamiliar with the company, Woodbois produces, manufactures, and supplies wood-related products. Aside from selling wood though, the AIM-listed company also recently got into the business of selling carbon credits.
It was the latter that sparked interest among investors at that time. Consequently, Woodbois saw its share price soar by more than 100% earlier this year. However, the hype has since faded as earnings potential from the scheme seems to have been overestimated. The timber producer is still awaiting approval for its inaugural project. Hence, the stock has been dropping to new lows.
Money doesn’t grow on trees
Nonetheless, the manufacturer continues to grow its overall top line. In its most recent quarter, Woodbois hit a record period of revenue. It brought in $5.8m, which is a 29% increase, year on year. That means its revenue, year to date stands at $17.1m, which is 35% higher than it was last year at this stage.
Additionally, Woodbois saw both its sawmill and veneer production levels increase by 78% and 45%, respectively. On that account, the group’s profit margin witnessed an improvement to 24%. For context, margins were 20% last year and 23% in the first half of this year.
Despite Woodbois having seen impressive growth, its rate of expansion has slowed down. Furthermore, its revenue has come at the cost of its balance sheet as it claims to have finished its most recent quarter with $1.4m of cash. This isn’t particularly great as this is a 36% decrease from just three months ago. Not to mention, the company still has $10.9m worth of debt to pay off.
Moreover, with “current worldwide uncertainties”, there’s no guarantee that profits are going to be flooding in. Therefore, investors risk getting their shares diluted, as the firm may need to conduct another round of stock offering to raise capital. This, I would argue, has been the main catalyst behind the fall in the Woodbois share price.
Stunted growth
So, will I buy Woodbois shares? Well, there’s no doubt that its top line growth is impressive given the current global macroeconomic environment. Not to mention, its carbon credits business offers plenty of upside potential. Institutions are moving towards lower emission targets after all. This then encourages them to purchase more credits to offset emissions, thus making this a multi-billion dollar market.
Nevertheless, its financials still leaves plenty to be desired with its earnings potential limited by regulatory approval. It’s for this reason that broker Canaccord Genuity recently rated the stock a ‘speculative buy’ with a price target of 6p.
Although its current P/E ratio makes its shares look enticing, I believe it’s a value trap. As such, I won’t be investing in Woodbois shares for the moment, but may take another look if its first carbon credits project gets the green light.
