Slater & Gordon Limited shares climb 13%: Is it time to buy?

Credit: Patrick McKnight

The ALL ORDINARIES (Index: ^AXAO) (ASX: XAO) index has barely moved today but the same cannot be said for one of its constituents, Slater & Gordon Limited (ASX: SGH). Its shares have risen nearly 13%. They’re fetching 31 cents at the time of writing, up from Friday’s closing price of 27.5 cents.

Indeed, today marks the first official day that the embattled law firm is trading outside of the benchmark S&P/ASX 200 (Index: ^AXJO) (ASX: XJO). It was recently demoted from the index as a result of the Standard & Poor’s Dow Jones quarterly review following a woeful performance from the group over the previous 12 months or so.

The once high-flying legal eagle has certainly had no shortage of headwinds during that time whereby everything started going downhill shortly after the group’s $1.2 billion acquisition of Quindell’s Professional Services division in the United Kingdom.

The company has since been the subject of a major investigation into its accounting practices (in Australia); it was forced to write-down the majority of the Quindell acquisition due in large part to proposed changes to personal injury laws in the UK, and the competency of its management team has also been called into question.

To make matters worse, the company is now drowning in debt. It will have a meeting with its banking syndicate in the very near future to propose a plan to repay that debt but if the banks don’t agree, or if any amendments that are required by the banks are not implemented by 30 April, Slater & Gordon could be forced to repay the entire amount by 31 March, 2017.

Needless to say, that is a huge risk facing the business — particularly given its weak cash flows from operations.

Although Slater & Gordon’s share price is up 12.7% today, the shares are still sitting more than 96% below their highs from roughly 12 months ago. Investors shouldn’t read too much into today’s gains at it is likely based on the hope from some investors of a potential rebound. Instead, Foolish investors should pay more attention to the enormous risks facing the business which I believe are far too great to warrant an investment.

Remember, just because a stock has fallen 96% doesn’t mean it can’t, or won’t, fall any further.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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.

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