Shares of medical device manufacturer Azure Healthcare Ltd (ASX: AZV) have fallen off a cliff this morning after the company provided an updated earnings guidance late last week.
So What: To be clear, when a company provides a market update after the market’s close on a Friday afternoon, it’s almost certain to be bad news. That was certainly the case with Azure Healthcare, which said it now expects a net profit after tax (NPAT) in the range of $0.8 million to $1 million for the 12 months to 30 June 2015, compared to the $3.87 million it achieved during the 2014 financial year.
Although the company expects to announce a 12% increase in revenues to $35 million, it increased its expenditure on staffing and research and development significantly to “resource itself for future anticipated growth”. In fact, this investment ballooned out to $4.7 million during the period, compared to just $2.6 million for the previous corresponding period.
Commenting on the guidance Azure’s Executive Chairman, Robert Grey, said: “Our increased investment resulted in higher operating expenses over the period, leading to an overall reduction in group earnings from the previous corresponding period. However the Azure Board remains committed to the Company’s long-term global growth strategy, including transitioning manufacturing and research and development to the largest healthcare market (the United States).”
Now What: An increase in research and development spend could certainly bode well for the company in the long run, but it also increases the risks facing the business today whilst also significantly impacting near-term profits. Although its forecast 12% revenue growth isn’t too bad, it’s certainly not enough to comfort the market based on these new developments.
The shares plummeted a massive 39.2% (or 10 cents per share) to trade at just 15.5 cents, which compares to a 1.6% smashing for the ALL ORDINARIES (Index: ^AXAO) (ASX: XAO).
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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.