Last year, Tungsten (LSE:TUNG) looked like it was set to become one of the markets most promising growth stocks.
Investors clamoured to get their hands on the e-invoicing servicesshares, bidding up the loss-making companys market value to a lofty 400m.
However, Tungsten has failed to live up to the markets lofty growth expectations. Moreover, and sensing blood, City traders have placed hefty short bets on the company, pushing its share price down by 70% year to date.
Missed expectations
Traders and speculators cant be blamed for all of Tungstens problems. Indeed, the company itself has failed to yield the lofty returns promised by management when it first came to market.
For example, Tungsten revealed last week thatonly 20% of the customers that it had signed up to use its invoice-financingfacility had beenable to borrow money. Lengthy background checks have restricted customers access to finance.
Tungsten had been aiming to lend out 58m by the beginning of this year. So far, loans outstanding only amount to 10.4m thats a big difference.
Risky business
Growth stocks like Tungsten cant afford to miss expectations by such as wide margin.
As Tungsten is yet to report a profit, investors and analysts alike have nothing to value the company on apart from its growth projections.
If management is struggling to meet these targets, it becomes almost impossible to place a value on the companys shares.
Crunching numbers
After factoring in reduced growth expectations, City analysts dont expect Tungsten to report a pre-tax profit until 2017.
Analysts figures suggest that the company will earn 14.3p per share for fiscal 2017, which puts Tungsten on a 2017 P/E of 8.4.
This seems cheap at first glance. However, Tungsten has shown over the past 12 months that it is struggling to grow at managements projected rate.
With this being the case, as there are over 24 months until Tungsten reported its fiscal 2017 results, we cant be certain that these forecasts will turn out to be correct. Anything could happen during this period.
Base case
As Tungstens future earnings growth is shrouded in uncertainty, it seems sensible to try and place a value on the companys shares using the companys book value.
Using the book value to work outTungstens value is a crude but easy-to-use tool for identifying if the company is overvalued or undervalued compared to the value of its assets.
Tungstens book value stands at around 170p per share. That said, there is a lot of goodwill and other intangible assets on Tungstens balance sheet. These assets could be wiped out or written off over time.
Stripping out these assets gives a tangible book value per share of approximately 41p. So, on this basis, Tungsten remains overvalued at present.
The bottom line
Tungsten has failed to live up to the markets lofty expectations for growth. And for this reason the market has turned its bank on the company. Whats more, based on Tungstens current financial position, its difficult to place a value on the group.
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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.
