Value trap
Also called: value traps
A share that looks cheap on valuation ratios but stays cheap or falls further, because the business is declining or the ratios are misleading.
Common causes are shrinking profits from technological change or competition, assets worth less than their book value, hidden liabilities, poor capital allocation, and value that never reaches minority shareholders. A low ratio is a question, not an answer.
Learn more in these lessons
- When valuation ratios misleadWhen do valuation ratios give the wrong answer?
- The P/B ratioWhat does the price-to-book ratio tell you, and when should you use it?
- Margin of safetyWhat is a margin of safety, and how big should it be?
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