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Here’s why Capitol Health Ltd shares are being annihilated today

Shareholders of diagnostic imaging company Capitol Health Ltd (ASX: CAJ) may be suffering from a spot of déjà vu today after the announcement of disappointing preliminary full year results and the suspension of its final dividend sent its share price lower by as much as 20%.

This was a similar story to six months ago when a sell off ensued following the company reporting a 19% drop in profits and suspension of its interim dividend.

Unfortunately for investors that expected things to improve as the year went on, things very much went the other way. Although revenue is expected to be up by 42% on FY 2015 to $158 million, on the bottom line the company expects to make a net loss before tax of $3.2 million.

Management revealed that this result was impacted by impairment charges, one-off acquisition costs, and restructuring costs amounting to $13 million.

This will be a second consecutive year of declining profits, which is no doubt very worrying for shareholders considering its $103 million debt. With its cash balance standing at $16 million I do have concerns that there could be some capital raising for Capitol Health around the corner.

As well as announcing its preliminary financial results, Capitol Health also used the announcement to advise that chief operating officer Peter Lewis will be stepping down after 12 months with the company. Whilst the company hasn’t provided a reason for his departure, it doesn’t fill me with a great deal of confidence to learn that a key member of the c-suite is leaving after such a short period of time with the company.

Managing Director John Conidi had this to say on the results:

“While this financial year has been difficult for the industry, Capitol has revenue growth and EBITDA consistency with the prior corresponding period. The outlook remains challenging to predict but we remain cautiously optimistic and are confident that the transformative nature of the investments we have made across the last two financial years coupled with our continuing investment in technology will drive earnings in FY17 and beyond.”

Despite how cheap Capitol Health’s shares may look now, I wouldn’t suggest buying the dip. Its declining profits and potential for a capital raising could well take the share price even lower in the coming months in my opinion.

Instead I feel investors would be better served taking a closer look at other healthcare shares such as Ramsay Health Care Limited (ASX: RHC), REVA Medical Inc (ASX: RVA), Pro Medicus Limited (ASX: PME) and Australian Pharmaceutical Industries Ltd (ASX: API).

Finally, nobody wants a faller like Capitol Health in their portfolio. So I would highly recommend investors check to see if they have these three rotten ASX shares in their portfolio today.

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Motley Fool contributor James Mickleboro 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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