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ResApp Health Ltd: The Last Company To Report In Earnings Season

Some people think that when a company reports a result at the last possible moment, it’s because it doesn’t want people to look too closely.

With that in mind, I couldn’t help but notice that ResApp Health Ltd (ASX: RAP) was the very last company to report its results in August. You can see what I mean in the image below.

Screen Shot 2016-09-01 at 9.47.18 am

So lets take a look at what its 16 pages of Preliminary Final Report divulged.

Well, the first thing to note is that the company lost $3.2 million. Keep in mind that its diluted current market capitalisation (if you include unlisted performance shares) is over $260 million.

The other thing to note is the company booked revenue of just over $82,000. That means if you buy shares at current prices you are paying about $3,000 for every $1 that the company booked in revenue in 2016… talk about growth expectations!

As I’ve said before, I think that there is a lot of potentially unjustified hype around ResApp‘s technology.

Now, I have nothing riding on the outcome of this story. If ResApp can sell their technology throughout the world, and make millions of dollars profit every year, then good on them. But if I may indulge my analytical ways for a moment, let’s dispassionately consider the possibilities of success.

The first place to look is the cash flow statement.

The company saw cash outflow of $2.6 million in the financial year to 2016. It finishes the year with $13.7 million. I have to say, that’s not too bad — it can last for quite a while at the current rate of spending.

However, the question for shareholders is whether management can take that $13.7 million, and build up revenues that can produce profits that can justify a valuation of $260 million (or more, if there is to be any upside from here). Realistically, to sustain such a large market capitalisation in my opinion, the company will have to make profits of at least $8.5 million per year and even then it would be on a P/E ratio of 30, implying strong growth after that.

If they do that, it will be be a truly impressive feat. More likely, though, if these guys thought they could take $13.7 million and ResApp’s technology, and make a business that earns $8 – $10 million per year they would not have listed it in the first place. If that’s what does happen, then Australia’s venture capital community have really dropped the ball on this one.

If ResApp can become profitable without raising capital again, I’ll tip my hat and happily accept I missed a winner.

I guess the crux of my argument is that most of the information around ResApp has to do with the investment opportunity, rather than the utility to patients or doctors. See the first page of google results below:

Screen Shot 2016-09-01 at 1.18.07 pm

Compare this to the first five google results for a medical device company that I do own shares in, SomnoMed:

Screen Shot 2016-09-01 at 1.17.53 pm

For SomnoMed, of the top five results only one directly relates to the investment opportunity, which is what I like to see (actually zero would be preferable, but nevermind).

A big part of why you see mostly positive coverage is that life is a lot easier for an analyst who only says positive things. For example, many people may attack an analyst who says something negative about a company. However, I also believe strongly that it is important to retain a balanced voice, being willing to criticise some companies, whilst commending others.

The Motley Fool gets its name from the Shakespeare play, As You Like It. Throughout Shakespeare’s work, the Motley Fool is the only character who can speak the truth to power, because it would be dangerous to anyone else. And that’s just one of the reasons I love this company.

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Motley Fool Advisor Claude Walker owns shares in SomnoMed. You can follow him on Twitter @claudedwalker.

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.