Why the Slater & Gordon Limited share price is tanking again

Shares in personal injury law firm Slater & Gordon Limited (ASX: SGH) have been on a wild ride recently.

They more than doubled in price immediately after the company said it had successfully agreed to bank facility amendments earlier this month. In fact they recently hit a high of 68 cents, up from just 29 cents a share.

But despite the initial optimism, the shares have retreated to 39 cents again in the time since, even falling as low as 34 cents on Tuesday.

The chart below shows the wild activity of Slater & Gordon’s share price over the last month:

Source: ASX

Source: ASX

What should investors do?

The announcement from the group was encouraging for investors. Indeed, it had been feared that an agreement with its banking syndicate would not be reached, whereby National Australia Bank Ltd. (ASX: NAB) and Westpac Banking Corp (ASX: WBC) could have forced Slaters to make a full repayment of its loans within 12 months.

Given Slater & Gordon’s historic inability to convert Work In Progress (WIP) into cash, such a task would have been impossible to do, with $783 million in bank debt and less than $52 million in cash as at 31 December 2015.

As such, it is clear why the announcement on 2 May 2016 boded so well for investors.

However, it seems investors are now recognising that even though Slater & Gordon did negotiate a new deal, the business itself is still facing an uphill battle which could yet result in further losses.

Slater & Gordon’s shares have actually risen 4% today, and have gained 11.4% since Monday. While those short-term gains may seem tempting for some investors, it is more important to look at the fundamentals of the business and weigh up its chances of success in the long-run.

Right now, there is plenty that Slaters needs to work on before it can prove its cash generating ability, while the group’s management team will also have to put in the hard yards in order to regain the market’s trust.

Until then, investors would be wise to avoid Slater & Gordon’s shares and look at some of the market’s more compelling businesses.

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Motley Fool contributor Ryan Newman has no position in any stocks 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.

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