This former penny stock has almost quadrupled in a year! Why?

What was a penny stock six months ago has soared since. Our writer explores why he did not buy then — and the lessons he keeps applying when hunting for value.

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British Pennies on a Pound Note

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Six months ago, McBride (LSE: MCB) was firmly in penny stock territory. The share price was in pennies and the market capitalisation was around £70m.

Now the share price has hit a pound and the market capitalisation is £174m.

The penny stock soared 144% in the past six months. But in the past year, it has almost quadrupled, moving up 282%.

Why – and could the lessons help me find great penny stocks to buy today, before they soar?

Cleaning up with McBride

Before we begin, you may be wondering what McBride does. It is not a household name, but you have very likely used its products.

That is because it is the manufacturer of household and personal care goods sold by supermarkets across Europe under their own names.

Why the stock sold for pennies

McBride has been listed on the stock market for decades. Its share price hit over £2 at the end of 2017.

So why, within just a few years, had it become a penny stock?

Less than two years ago, McBride shares cost 16p each.

A look at that year’s results tells the story. Revenue was basically flat. But an £11m pre-tax profit in 2021 had turned into a £36m pre-tax loss. Net debt jumped £46m to £164m.

The company’s auditors included in their assessment of the books “a material uncertainty in respect of going concern”.

Some free lessons

Such concerns can affect other penny stocks so it is worth taking time to understand them. I think McBride offers me some useful lessons as an investor, for free!

Flat revenue on its own is not necessarily a bad or good sign.

Some people think a successful company ought to be growing its revenue. In fact, though, some contracts make a company money but others can be loss-making. So reducing revenue in the right way can actually help profitability.

In the case of McBride, revenues had been in decline for some years before 2017, rose for a couple of years, then fell. When looking at any business, I think it is important not only to look at revenues but at the quality of those revenues.

Studying the balance sheet

The big swing into the red in McBride’s 2022 accounts combined with rising and substantial net debt (relative to the company’s market capitalisation) at that point was a key reason I never bought into the penny stock.

If an indebted company keeps losing lots of money, there is a danger it either gets even more indebted or ends up bankrupt. In that case, even paying pennies for a share would be bad value.

So when an auditor expresses material uncertainty about whether a company can continue as a going concern, I take that seriously. It is an enormous red flag for me, as I am an investor, not a speculator.

Looking for bargains

Last month, McBride announced half-year revenues up 9.8%, pre-tax profit of £17m compared to a £20m loss in the prior year period, and a fall in net debt, although it remains substantial at £146m.

With a turnaround still in progress, I have no plans to invest.

McBride has soared lately but some penny stocks just keep losing value. Being rigorous selecting the ones I do buy can hopefully make me more likely to choose winners!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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