How low could the boohoo share price go?

Jon Smith explains why the enterprise value and the low risk of bankruptcy should help to prevent the boohoo share price from falling further.

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As a business, boohoo group (LSE:BOO) has endured a torrid time since the pandemic. The share price is down 33% over the past year. In fact, during the summer of 2020 the stock traded above 400p. It now sits at 36p. I’ve been tempted to buy the stock before, but concluded when I wrote about the firm in January to stay away. Should I change my view?

Issues in recent years

The business has been hit with various problems since 2020. For example, a modern slavery scandal was cited at its factory in Leicester, with claims workers were being paid as little as £3.50 an hour.

Reputational damage was further inflicted with other ethical concerns about clothing production standards. Not only this, it was revealed at the start of this year that clothing made in South Asia was labelled ‘made in the UK’.

Aside from these points, the firm’s had to contend with broader post-pandemic supply chain problems that are only just starting to ease. Spiralling inflation has pushed up the cost of manufacturing and shipping, putting pressure on the profit margins.

After posting a profit in 2021, the business flipped to being loss-making in 2022 and 2023. This doesn’t bode well for the future.

Nearing the bottom

If it seems like the business is in a bad place, it is. When I look at the share price, it has mirrored the general poor sentiment, tracking lower and lower. However, there will come a natural floor in the share price.

This is because unless the business goes bust, it will always have an intrinsic value. The enterprise value’s a good measure of this, as an alternative way to the market-cap, to see what a business is worth. At the moment, the enterprise value is £580m, higher than the market-cap of £454m.

So what this tells me is that the share price is actually lower than it should be, if we are just assessing what the business is worth right now. This could suggest the stock’s undervalued.

Unlikely to go broke

Of course, if people think the firm will go bust, the share price could fall much lower. But even though boohoo’s making losses, I don’t see any material concern about this happening. In the 2023 report, it flagged up strong cash generation with free cash flow of £30.2m. Further, it has £5.9m of net cash and a £325m revolving credit facility.

Therefore, it has plenty of funds to ensure operations can keep going for the foreseeable future.

When I pull all of this information together, I don’t believe the share price can go much lower. I could be wrong, but it’s undervalued versus the enterprise value and unlikely to go bankrupt any time soon.

I’m still not going to buy right now as I don’t see any positive news on the horizon. Yet when the tide does start to turn, I could definitely see myself adding this to my portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jon Smith has no position in any of the shares 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.

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