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As Nanoco Group PLC Plunges, Is It Time To Cut And Run?

The year hasn’t started well for Nanoco Group (LSE: NANO). The company’s shares slumped nearly 20% in early trade this morning, as a major investor sold some shares in the quantum dot producer.

Moreover, today’s declines have been compounded by the fact that around 7% of Nanoco’s shares are out on loan to short sellers. This means that Nanoco is one of the most shorted shares traded in London, although it’s easy to see why. 

At current prices Nanoco has a market capitalisation of £250m, even though the company is not making a profit and has only £18.5m of assets, according to its 2014 annual report.

What’s more, according to City analysts the group is not expected to report a profit until 2016. A profit of £4.2m is expected for 2016, earnings per share of 1.7p. These figures indicate that Nanoco is trading at a 2016 P/E of 85.3, a lofty valuation, which leaves little room for error.

Unfortunately, the company has already missed City forecasts several times over the past few years. If Nanoco fails to meet the market’s lofty expectations then the company’s shares could fall rapidly back to earth. 

Time to sell?

Nanoco’s high valuation is concerning but is it a reason to sell? Well, 2015 promises to be a transformative year for Nanoco as the company works on its joint venture with The Dow Chemical Co.

In September, Dow said it would start construction on the first large-scale, cadmium-free quantum-dot manufacturing plant in the world in South Korea. Commercial production of Nanoco quantum dots at the plant is set to start this year.

However, this joint-venture agreement was originally signed with Dow in January 2013, with production slated to start during 2014. So, even though progress is now being made on the project, I wouldn’t rule out further delays. 

Additionally, even though Nanoco is currently producing quantum dots from its production facility in Runcorn, in order to meet demand from customers ahead of the Dow plant coming on-line, the group is at risk of running out of cash. Specifically, Nanoco’s preliminary results for the year ended 31 July 2014 show that the group used £7m in cash to finance operations and capital spending during the period, on revenue of around £1.5m. The cash outflow was financed with the issue of new equity. 

Still, while it looks as if Nanoco might have to raise more cash to stay in business, if production at the Dow plant begins on time, Nanoco could avoid a cash call. 

Not all bad news 

It’s not all bad news, however. Nanoco worked hard last year to sign contracts for screen development with a number of display makers from South Korea, Japan, United States, China and Taiwan for televisions, monitors and tablets. So, things could be about to change for the company.

Nevertheless, until the group can show some solid progress by generating a profit, the market will remain sceptical and that lofty valuation is concerning. So overall, the company remains a risky bet and may not be suitable for all investors’ portfolios.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.