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Why I’d consider Versarien plc after almost three-bagging in a year

Shares in small-cap Versarien (LSE: VRS) have exploded this year as the company has made steady progress towards becoming a leading graphene business. 

The last time I covered the company, at the beginning of April, Versarien had just acquired an 85% stake in Cambridge Graphene. A few weeks earlier, the group also signed heads of terms for a distribution agreement with Lansdowne Chemicals for its recently-launched graphene brand Nanene. The partnership followed what management described as “one of the first significant orders placed in the UK for the supply of high-quality graphene” at the end of 2016. 

From strength to strength 

Seven months on and it looks as if Versarien’s outlook has only improved. At the beginning of July, the company announced its figures for the year to March 31 revealing revenue growth of 35% to £5.9m… but an increased pre-tax loss of £2.2m. 

Since these figures were published, the group has announced some new contract awards, including a £200,000 order for precision components for use in engines for one of the world’s leading airliners. 

At the beginning of November, management revealed that the level of interest being expressed in Versarien’s graphene “continues at record levels.The update also noted the firm was in “advanced negotiations with two of the world’s largest consumer goods” regarding collaboration on “research, development and testing of Versarien’s proprietary Nanene few layer graphene nano-platelets in polymer structures“. On November 17, the company confirmed the start of a collaborative effort between it and one of the two consumer groups, which had placed its first order. 

Enormous potential market 

All in all, it looks as if Versarien is growing rapidly and the potential market for the firm is massive. 

The global graphene market is projected to expand from $20m (year-end 2016) to $600m by 2025, and if Versarien can grow at the same rate (53% per annum), revenue could surge to £177m per year by 2025. This is a highly optimistic forecast, but it shows the opportunity the firm has.

Having said all of the above, I need to stress that this is a highly risky opportunity. 

Cash in the bank?

Even thought Versarian has made enormous progress in signing on customers during the past year, the one area where the firm is still struggling is profitability and cash generation. 

In the past year, the company has raised £4.4m from investors to keep the lights on. At the end of March, the firm reported a cash balance of £1.4m and has since raised £2.9m via a placing, so it looks as if it’s still burning through a few million pounds a year. 

The good news is that it seems investors are more than happy to fund the group through these early stages of growth. The last placing at the end of November was more than twice oversubscribed and was enlarged from its original goal of £1.2m to raise a total of £2.9m.

With the backing of its shareholders, Versarian has time to grow its operations and take advantage of the enormous opportunity it has in front of it. That’s why I’m considering adding the shares to my portfolio. 

The biggest mistake investors make

Early stage, high-risk companies like Versarien can collapse if they don't have the support of shareholders, which is why it's important to only invest in those companies that have a robust financial profile. 

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Rupert Hargreaves owns no share 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.