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Are Woodbois shares a bargain or a basket case?

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Sometimes a company captures the collective imagination of the private investing community. And I reckon Woodbois (LSE: WBI) shares represent one such business. There seems to be an insatiable interest in every move the enterprise makes. But why? It’s time for me to investigate whether I should be adding the stock to my long-term investing portfolio.

Fast-growing revenue

The company is an Africa-focused forestry enterprise. And it has three divisions. One produces sustainable African hardwood products. Another trades hardwood and hardwood products. And the third is a reforestation and carbon credit operation. 

I think the excitement about Woodbois arises because the company has been growing revenues at a blistering pace. And in June, with the half-year report, the company notched up its first ever” operating profit. In the first six months of the year, the business delivered $15k of profits at the operating level versus a loss a year earlier of $0.7m.

And that outcome looks like encouraging progress. However, there seems to be an issue with cash. In the first half of the year the company produced positive operating cash inflow of just $0.2m versus an outflow a year earlier of $2.2m. Progress, yes. But that’s a long way below the figure for operating profit.

We found out more in August with the third-quarter update. I looked for the updated operating profit figure. But I couldn’t find it. Instead, there was impressive-looking growth in the figures for revenue, gross profit and production levels. But I’m in the dark about recent performance regarding operating profit.

Meanwhile, I compared the cash balance figures in the first-half and third-quarter reports. On 30 June, the company had $2.1m in the bank. But by 30 October, the balance had dropped to $1.4m. So, despite progress with revenue, the business appears to be burning cash.

Is there a cash crunch coming?

However, that’s not an unusual situation for a fast-growing enterprise. And it can be especially true when a business is investing money to expand its production facilities. However, there’s always a danger that cash flow and profits can’t keep pace with the fast expansion of a business. And that could be happening with Woodbois now. Indeed, looking at those cash figures, it seems the business may be heading for a cash crunch. And that could lead to the need to raise more funds.

But such an outcome isn’t certain. After all, in August, chief executive Paul Dolan said in the third-quarter report the business delivered “record quarterly revenues, production and margins.” However, he sounded a cautious note by adding the current worldwide uncertainties means the firm will “continue to be resilient and adaptable.”

Nevertheless, he is looking forward “with confidence” to further growth in 2023 and beyond. But he didn’t specify whether the growth will likely be in revenue, cash flow, profits or all three.

The full-year results, due in March 2023, will reveal more about the situation regarding profits and cash flow. But the verdict of the stock market has been brutal for shareholders. A year ago, the share price was around 4.8p and today it’s near 2.68p.

Is Woodbois a bargain or a basket case? I’m waiting for the next set of trading and financial figures before deciding about that.

The post Are Woodbois shares a bargain or a basket case? appeared first on The Motley Fool UK.

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Kevin Godbold has no position in any of the 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.