Performance nanochemicals and advanced materials company Graphene Nanochem (LSE: GRPH) is falling today, after the company issued a profit warning. However, the company also announced that its sales during the first half of the year doubled.
So, should you take advantage of today’s slump to initiate a position?
Missing forecasts
Graphene’s management announced today that the company would make a loss for full-year 2014, which is significantly below current expectations. The City was expecting the company to report a small pre-tax profit of £2.9m this year.
The company blamed this warning on the slower than expected development of its Plat Drill Series of oilfield chemicals, which have run into regulatory and testing constraints. As a result of these delays, revenue that was supposed to be booked this year, will be booked during 2015.
Still, Graphene reported a 102% increase in revenue to £20.4m for the first half of the year, and losses narrowed to £3.5m from £5.4m. So, there’s no denying that the company is making rapid progress.
Risk and reward
As I write, following this morning’s profit warning Graphene’s shares have fallen by a third today, and it’s easy to see why.
Indeed, before today’s announcement the company was trading at a forward P/E of 25, leaving little room for error if things went wrong. Unfortunately, things have gone wrong and today’s declines highlight the risks of investing in high growth companies.
Nevertheless, with Graphene’s shares down by more than 30%, investors now have the chance to buy in at a lower valuation and more attractive price. For example, Graphene’s sales are expected to hit approximately £40m this year, based on first half figures. This means that the company is trading at a price to sales ratio of just over 1.1. In comparison, many of the company’s peers are trading at a P/S ratio of 2.3.
However, as Graphene is now slated to make a loss this year, it’s not possible to work out a P/E ratio for the company.
On the other hand, Graphene is making raid progress in developing its product offering and growing sales. If the company can hit next year’s sales targets, profitability could be just around the corner.
But the company needs to get its house in order as it is running out of cash fast. At the end of June cash and cash equivalents stood at only £2.8m, down from £7.4m at the end of 2013.
What to do
Today’s news from Graphene is disappointing but it’s not the end of the world. The company’s sales are exploding and the launch of Plat Drill chemicals should only boost revenue.
All in all then, Graphene has a bright future, if it can successfully bring products to market next year.