The Motley Fool’s Head of UK Investing and resident small-cap whizz Mark Rogers weighs in on the Globo debacle — will investors get anything back?
In the latest of a string of staggering developments, yesterday afternoon embattled small-cap Globo (LSE: GBO) announced that it had entered administration, little more than a week after the company revealed shocking details of the “falsification of data and the misrepresentation of the Company’s financial situation”.
Prior to last week, Globo was a popular share among British private investors, commanding a market capitalisation of £300m in 2014 — but now it seems doubtful that investors will see a penny.
Globo reported a cash balance of €104m only a couple of months ago. Where did that money go? Was it ever there to begin with? Was Globo a fraud all along?
Angry investors caught up in the scandal are demanding answers.
Globo meltdown
Here’s the statement in full:
It’s been an astonishing ten days for the “mobile application specialist”, and here at the Fool our sympathies go out to the ordinary private investors caught up in the mess. Many of those burned by the Globo scandal — much like the Quindell debacle last year — were everyday investors who saw value in the “high growth, low P/E” share.
But there were plenty of warning signs to take heed of in Globo’s case.
Reported profits were failing to translate into actual cash flow after using the trick of “capitalising” millions in hidden costs into intangible assets on the balance sheet. Despite reporting having €104m in the bank, the company attempted to borrow even more money at high interest rates — another serious “red flag”. I’d like to credit Stockopedia’s Paul Scott for his excellent work in flagging up these concerns on his daily small-cap blog.
No “Hidden Winner”
At The Motley Fool’s small-cap advisory service Hidden Winners, my team and I issued an official warning to our members to “Avoid” Globo back in early October, citing these worries about the company’s accounts. But I’ll be the first to admit that we couldn’t have predicted how rapidly things would deteriorate less than a month later!
I think it goes to show how important it is for investors to focus on “quality” when investing in small-cap ventures. It really is crucial for private investors to be extra cautious when it comes to reviewing small-cap shares, especially when the value on offer seems “too good to be true”. In the case of Globo, that was certainly the case — and with the shares on the verge of being cancelled from AIM, investors are looking at losses of 100%, no matter what price they paid.
At The Motley Fool, and in our Hidden Winners small-cap service, we’re not just interested in reported growth numbers or a “low P/E” — these are simply rule-of-thumb metrics to give a rudimentary snap-shot of value. You really have to dig deeper to ascertain the true value and potential of a long-term investment.
Small-cap investments can offer wonderful opportunities to grow your wealth, but you really do have to focus on the underlying business.