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eBet Limited disappoints with full-year results: Should you buy?

What: Shares in eBet Limited (ASX: EBT) plunged 5% on Monday after the company announced a fall in revenue, but a jump in normalised profit and earnings per share. eBet’s fall in revenue, down 6% year-on-year, was representative of the loss of an agreement with US-based WMS industries to distribute WMS gaming machines in Australia.

Luckily for investors, profit from eBet’s core business of developing and managing backend systems for gaming machines partially made up for the loss of machine sales. The company conveniently provided both a statutory and normalised result (that stripped out the previous year’s contribution of machine sales) to provide a simpler comparison of the remaining business segments.

Normalised net profit after tax rose by 7%, earnings per share increased by 6%, and the group’s debt load was reduced by 34% to just $2.5 million, or a debt to equity ratio of 11%.

So what: Investors only had a short period of time to take advantage of the 5% fall. Within an hour the share price had recovered to where it was prior to the release of the results, however it did end the day down nearly 3%.

The loss of the WMS contract was well publicised, however revenue from the remaining segments disappointed, earnings before interest and tax were lower than some analysts’ expectations, and the tax payable on profits higher.

What now: For those considering eBet, the next couple of months could prove to be a good long-term investment opportunity if there is a sag in the share price owing to the disappointing revenue numbers.

On the plus side, the group recently acquired a competitor in the gaming systems business and completed an institutional capital raising that funded the purchase and further reduced debt to just 8% of issued equity.

The financial community covering the stock expects revenue to grow between 15% and 20% and earnings per share by between 30% and 40% next financial year, however management haven’t given any indicative numbers of its expectations. Importantly, 52% of revenue is recurring in nature and gives some indication of expected earnings levels, however growth in gaming maintenance and monitoring contracts will be important if shareholders are to be rewarded.

Investors can make a fortune from companies like eBet if they can surprise the market with greater-than-expected growth. Another stock that the The Motley Fool team believes could make shareholders plenty of money over the long term is a small but ultra promising ASX company. You can get the name and code for free right now by clicking here.

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Motley Fool contributor Andrew Mudie does not own shares in any companies mentioned. You can find Andrew on Twitter @andrewmudie

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