Performance nanochemicals and advanced materials companyGraphene Nanochem(LSE: GRPH) is falling today, after the companyissued 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 todays slump to initiate a position?
Missing forecasts
Graphenes 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 ofits 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, theres no denying that the company is making rapid progress.
Risk and reward
As I write, following this mornings profit warning Graphenes shares have fallen by a third today, and its easy to see why.
Indeed, before todays 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 todays declines highlight the risks of investing in high growth companies.
Nevertheless, with Graphenes shares down by more than 30%, investors now have the chance to buy in at a lower valuation and more attractive price. For example, Graphenes 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 companys peers are trading at a P/S ratio of 2.3.
However, as Graphene is now slated to make a loss this year, its 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 years 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 cashequivalents stood at only 2.8m, down from 7.4m at the end of 2013.
What to do
Todays news from Graphene is disappointing but its not the end of the world. The companys sales are exploding and the launch ofPlat 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.
That being said, investors need to keep an eye on Graphene’s progress as further contract delays could jeopardise the company’s future. Ifyou feel that Grapheneis too risky and you’re looking for a safer bet,analysts here at the Motley Foolhave identified a sharethat theybelieve has the potential to nearly double profits within the next four years. So, if you’re looking for ideas, download this exclusive report entitled“The Motley Fool’s Top Growth Stock For 2014”.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
