What a brutal six months it’s been for First Advantage. The stock has dropped 23.4% and now trades at $13.95, rattling many shareholders. This may have investors wondering how to approach the situation.

Is now the time to buy First Advantage, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free for active Edge members.

Why Is First Advantage Not Exciting?

Despite the more favorable entry price, we don't have much confidence in First Advantage. Here are three reasons why FA doesn't excite us and a stock we'd rather own.

1. EPS Barely Growing

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

First Advantage’s full-year EPS grew at a weak 1.8% compounded annual growth rate over the last four years, worse than the broader business services sector.

2. Free Cash Flow Margin Dropping

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

As you can see below, First Advantage’s margin dropped by 15.1 percentage points over the last five years. If its declines continue, it could signal increasing investment needs and capital intensity. First Advantage’s free cash flow margin for the trailing 12 months was breakeven.

3. Previous Growth Initiatives Haven’t Paid Off Yet

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

First Advantage historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 0.9%, lower than the typical cost of capital (how much it costs to raise money) for business services companies.

Final Judgment

First Advantage’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 11.7× forward P/E (or $13.95 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better investments elsewhere. We’d recommend looking at the most entrenched endpoint security platform on the market.

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