Why the Slater & Gordon Limited share price is falling today

Shares in law firm Slater & Gordon Limited (ASX: SGH) are down 3% to 46.5 cents today as the loss-making lawyers remain in danger of bankruptcy unless it can reverse disastrous cash outflows delivered in the first half of FY16.

As at December 31 2015 the group had drawings of $783 million on its debt facilities versus a limit of $850 million, with a net debt position of around $741 million and available liquidity of around $119 million.

The first half of the financial year also saw a net cash outflow of $83.3 million, which was primarily the result of the disastrous performance of the firm’s $1.3 billion acquisition of the claims management business of UK firm Quindell Plc.

Management weren’t wrong in describing the acquisition as ‘transformational’ with the share price sinking around 90% since the deal and the law firm now at the mercy of its lenders after having to renegotiate the terms of its borrowing facilities.

The group’s chief executive Andrew Grech must now be on borrowed time at the firm and a career in venture capital seem unlikely when he does eventually head out the door in search of pastures new.

Given that at 46.5 cents the group has a market value around $169 million and net debt of $741 million its enterprise value is around $910 million. This means it would need to deliver full year EBITDA of $91 million to trade on a low multiple of 10x EV/EBITDA.

This would require positive cash flow of around $170 million in the second half which appears extremely unlikely unless the firm can execute a dramatic turnaround to translate the large amount of work in progress on its balance sheet to positive cash flow for the six months ending June 30 2016.

The management team has always stated cash flows would be heavily weighted to the second half, although no new guidance has been given as the threat of class actions also hangs over the group. Given its mountainous debt pile Slater & Gordon remains in some deep dodo, with plenty of risk to the downside due to its crippled balance sheet.

Why These 3 Blue Chip Shares Could Lift Your Portfolio in 2017

Discover The Motley Fool's top 3 blue chips to buy nows. These 3 'new breed' shares pay fully franked dividends AND offer the very real prospect of significant capital appreciation. Simply click here to gain access to this comprehensive FREE investment report.

No credit card required.

Motley Fool contributor Tom Richardson has no financial interest in any company mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

HOT OFF THE PRESSES: My #1 Dividend Pick for 2017!

With its shares up 155% in just the last five years, this ‘under the radar’ consumer favourite is both a hot growth stock AND our expert’s #1 dividend pick for 2017. Now we’re pulling back the curtain for you... And all you have to do to discover the name, code and a full analysis is enter your email below!

Simply enter your email now to receive your copy of our brand-new FREE report, “The Motley Fool’s Top Dividend Stock for 2017.”

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.