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Is this tempting small-cap about to shoot the lights out?

The Tungsten Corp (LSE: TUNG) share price has been flying. Since its nadir in February, the price is up almost 120% and today the shares change hands near 48p.

That’s a decent five-month return for shareholders, but my guess is that many were well down from their original buying prices because the firm has been something of a serial disappointer over the years.

Reducing losses

Given the history of loss-making, I reckon timing a purchase to catch that gain would have been difficult. Yet the share-price action suggests that some investors were buying. Indeed, there’s a turnaround under way in the underlying operations.

The firm tells us in its news releases that it aims to be the leading global electronic invoicing and purchase order transactions network. However, despite providing such services for an impressive list of massive customer organisations, it has failed to turn a profit… so far.

In today’s full-year results report for the trading year to 30 April, we can see that continuing revenue increased by just over 6% compared to the year before, to around £33m. The operating loss came in at £2.6m. Imagine having your own business and you worked hard all year to turnover £33m, only to find at the end of the year you were £2.6m worse off than before you started the year’s trading – that’s the harsh reality of loss-making businesses.

An optimist would point out that the operating loss has fallen from £10.5m the year before and is, therefore, heading in the right direction. But the net cash figure on the balance sheet depleted by 55% to £2.6m in the period. In other words, it looks like it cost more than £3m to keep things running. Tungsten is in a race against time before the money runs out, and we could see further capital-raising and shareholder dilution ahead.

A brighter future?

But executive chairman Tony Bromovsky thinks the future looks brighter. He said in the report that the directors “have confidence in the Tungsten suite of solutions and offerings.” He reckons the business is “well positioned, following a period of transformation, to achieve future growth and profitability.”

However, I reckon there’s a problem for shareholders. The market capitalisation stands at almost £62m, which is near twice the level of revenue reported. Given that the firm appears to work in a low-margin sector, a high, growth valuation seems inappropriate. The advances in revenue are unimpressive to me, and the company has after all, so far, been unable to turn a profit. My guess is that when profits do finally emerge from the enterprise in future periods, the potential reality of their small size could prompt a valuation de-rating, which could see the shares plunge.

Tungsten has been busy cutting costs and restructuring, but we need to see worthwhile and profitable growth kicking in if the stock is to continue its rise. Given the company’s long history of struggle, I think that’s a tall order, and any annual earnings advances could be modest. So I’m avoiding the stock for now because I don’t think it’s about to shoot the lights out and it could move south instead.

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Kevin Godbold has no position in any 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.