At the time, the data security firm which specialises in data erasure and computer reuse, said a number of factors (including the slippage of some big contracts) had put pressure on its cash position — net debt was revised to £5.5m, and the company reckoned it needed £4m “over the coming weeks” to prop up its working capital. A placing which raised approximately £9.45m was the result.

Then on Thursday we had another trading update, revealing a further hole in Blancco’s finances. That led to a 20% crash, and as I write the shares are at 118.5p.

This time we hear that “cash flow and net cash are below market expectations due to the non-payment of £3.5m of receivables, the majority undertaken in the prior year“. That’s led to a charge of £2.2m.

An awakening

The company has apparently had a bit of a lightbulb moment, speaking of “the group’s intention to apply a more prudent approach to revenue and income recognition on this type of contract in the future“.

So, wait a minute… it’s not until the fan gets heavily soiled that a company with prior cash flow problems realises that being prudent when recognising revenue might actually be a good idea?

At this stage I was going to look at Blancco’s fundamentals, but that would be pointless right now when I’m shocked by its apparent inability to see cash flow problems promptly.

A company that suddenly realises it needs urgent cash within weeks to keep going, and still does’t recognise the inadequacy of its income recognition policy until several months later… well, that’s not a company to which I would trust a penny of my investment cash, whatever the ratios say.

Losing the game?

Today’s antics from Blancco reminded me of that other spectacular recent fall, Game Digital (LSE: GMD). Game’s shares had been sliding for months when a trading update on 30 June sent them over a cliff — a 67% crash over the past 12 months to today’s 19.5p. 

Game’s fundamentals actually look decent, with forecasts suggesting a P/E as low as 6.6 for the year ending July 2017 — although that’s a year in which earnings per share are expected to plummet by 80%. The forecast dividend of 1.3p would provide a yield of 6.2%, but in the light of its slashing from 14.7p to 3.4p in in 2016, it’s not something I’m going to put much faith in. 

Even a mooted 55% EPS recovery in 2018 does not attract me to the shares, and I’ll tell you why.

Dying business

The problem I see is that the retailing of binary digits through actual bricks and mortar stores looks to be an increasingly bad idea — the same way online distribution of music has killed many a retailer of CDs (or “record shops” as I still like to think of them).

My ISP has just upped my broadband to a nominal 150Mbps (and unlike many, it actually works out better than that — testing it showed 164Mbps). Why would I want to go all the way to a shop to buy a physical plastic thing when I can have massive digital content downloaded in minutes?

These two shares are beyond the end of my bargepole.

The post Is Blancco Technology Group plc a falling knife to catch after dropping 20% today? appeared first on The Twelfth Magpie.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

This unsurprisingly turned out to be disastrous for the share price, which was off over 25% in early trading. But now that this fast-growing small-cap is more attractively priced at 28 times trailing earnings, is now a great time to begin a position?

On one hand, the company’s two core segments are growing rapidly. Data erasure, which scrubs companies’ IT assets of all data to comply with regulatory requirements, grew sales 36% year-on-year in constant currency terms. And the diagnostics division, which troubleshoots IT problems with companies’ mobile devices, increased sales 189% during the period. Together, this meant sales for Q3 were up a whopping 48% year-on-year.

However, there are warning signs that have me nervous. The largest is that the company is still firmly in start-up mode, which means opening new offices, hiring new employees and generally burning through cash. There is nothing inherently wrong with this. But if the company is having problems accurately projecting costs associated with previous M&A activities and judging when customers will actually pay (the main causes of the cash flow shortfall), it does not speak well of how its expansion is being handled.

This is especially worrying with AIM-listed tech companies, which have a long history of failing minority shareholders. Blancco’s business appears to be moving along nicely, but the company’s inability to forecast cash flow, rising debt and questions over where it will raise the necessary £4m are red flags that would stop me from investing at this point.

Similar business, safer choice 

That said, a safer option in a similar market does exist in the form of Restore (LSE: RST). The company is best known for its document management services, which allows law firms, hospitals, accountants and the like to securely store critical paper documents in its facilities.

The company is now the biggest provider of these services in the UK, second largest provider of shredding services, and is also a major player in the data erasure and relocation businesses. Offering this array of services is winning over new clients at a rapid clip and together with acquisitions sent sales rising 41% year-on-year in 2016.

EBITDA and statutory profits grew in line with this increase and look set to rise further in the coming years as the company cuts costs from acquisitions and bundles more services. With net debt rising to 2.46 times EBITDA at year-end due to acquisitions, the company will likely avoid big acquisitions for the time being. But with impressive cash flow, this level of leverage shouldn’t be a worry in the long term.

Restore’s shares are priced for growth at 19.1 times forward earnings, but with a stellar record of growing sustainably, a market leading position in its core business and increasing regulatory-mandated demand for its services make the company one to watch.

The post Is Blancco Technology Group plc a falling knife to catch after dropping 25% today? appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.