At the time of writing, the stock trades at a forward P/E of just 7.4 and an enterprise value-to-EBITDA ratio (EV/EBITDA) of 4.4. To put this into some perspective, the rest of the market trades at a median EV/EBITDA ratio of 10.9 and the global metals and mining sector commands a multiple of 7.1.

However, the question we have to answer is, why is Evraz so cheap in the first place?

What’s the deal? 

I think there are three main answers to this critical question. First of all, Evraz is a Russian headquartered business, so there’s a bit of country risk here.

Second, it operates in a highly cyclical industry where any number of factors can decimate profits. Indeed, the company has only been profitable for the past two years, and between 2013 and 2016 it racked up nearly $2.5bn in net losses.

And third, the group has quite a bit of debt. Net debt as a percentage of equity was 211% at the end of 2018. On this last point, the company is making progress. It reduced net debt from $6.4bn to $3.5bn between 2013 and 2018.

Evraz has been able to reduce debt so quickly because it is throwing off cash. Free cash flow has totalled $8.5bn over the past six years, which is why the company was able to distribute $1.6bn to shareholders via dividends last year.

This cash generation doesn’t entirely make up for the company’s other faults, but in my opinion, it does show how resilient this business is. Some investors might not be comfortable investing in a business that is so exposed to Russia, but I think a lot of this risk is already reflected in Evraz’s discount valuation and a dividend yield of 8.8%. So, if you’re looking for value stocks, it might be worth considering Evraz for your portfolio.

Too cheap to pass up? 

Another value stock that I think might be worth your research time is Petra Diamonds (LSE: PDL).

Petra is very similar to Evraz, in my opinion, because this company is also struggling with a high debt load and volatile earnings. But once again, I think the majority of this risk is already reflected in the stock’s valuation. It is dealing at a forward P/E of just 3.7 at the time of writing and EV/EBITDA ratio of 4.2. 

That being said, I believe the business does deserve to trade at a discount to the rest of its sector because earnings are falling. Today, the company announced a 7% increase in fiscal third-quarter revenue due to a 6% fall in sales volumes. Net debt did fall marginally during the stated period (down 1% quarter-on-quarter), but this still leaves the business with a net gearing ratio of 120%.

These figures are not that impressive, but as I mentioned above, I think Petra’s current share price already reflects most of the pessimism surrounding a business and even a small uptick in expectations might lead to a significant re-rating of the stock. With this being the case, it might be an attractive investment for risk-tolerant value investors.

The post Is this FTSE 100 stock the market’s most undervalued? appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

And today, shareholders have been greeted with yet more bad news. The group issued a trading statement this morning warning that its risk of breaching its earnings covenants at the end of 2017 has risen due to the sensitivity to changes in diamond prices, exchange rates and expected production.

This isn’t the first time the company has had to warn shareholders about the possibility of default. Back in September, management issued a statement noting that flexibility on debt facilities with covenants tied to earnings before interest, tax, depreciation and amortisation was tight, and it looks as if the situation has become tighter still since this warning. 

Operational slowdown

Petra is blaming “labour disruption at three of the company’s South African operations and the uncertainty around the final volume of sales for the Williamson mine in Tanzania in the first half of 2018” for its debt problems. Creditors have been alerted to the company’s precarious fiscal position and management “will remain in regular engagement” with lenders to find a solution. 

Still, despite the low fiscal headroom the company has left, according to today’s update, management believes that the firm has sufficient liquidity from existing cash resources and operating cash flows to meet liabilities as they fall due, assuming there’s no sudden, unforeseen change in circumstances. 

Looking at today’s update, it would appear that Petra’s problems are not terminal just yet. That being said, in my view, the company is skating on thin ice. Even though management believes the company’s cash resources are sufficient to keep the lights on in the near term, by being close to breaching its lending covenants, the group is dangerously close to becoming a slave to its creditors. 

Rough patch 

Petra’s liquidity warning comes after a rough few months for the company. Last month the South African Kimberley mine was disrupted due to a labour dispute ahead of the signing of a new wage agreement. And it was forced to suspend exports from its Williamson diamond mine in Tanzania after the government seized a parcel of diamonds from the mine, declaring it was undervalued. Both of these issues have now been resolved. The labour dispute concluded at the end of September, and the Williamson mine is back in operation. 

Nonetheless, while these headwinds may now be behind the firm, their impact on the business is still being felt. Petra now has very little room for manoeuvre if it has to deal with any more unforeseen stoppages and for this reason, I believe that the company is not an attractive investment. 

City forecasts have the shares trading at a forward P/E of 9, which may seem cheap, but to me, this valuation seems appropriate considering the risks facing the company. 

The post After falling 10% in just 3 days, I’m not catching falling knife Petra Diamonds Limited appeared first on The Twelfth Magpie.

More reading

• Why Barclays shares could have a huge second half of 2026
• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?

Rupert Hargreaves does not own any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.