Good morning! Fairly quiet again today for news.

Surgical Innovations (LON:SUN)

Share priceL 1.75p
No. shares: 404.7m
Market Cap: £7.1m

Profit warning - this is not good at all. The company has 'fessed up to a number of items that will require £1.6m in exceptional charges in the current year (ending 31 Dec 2014). These include;

  • Reversing out previously booked sales of £0.6m
  • Write-down in trade receivables relating to anticipated rebates from distributors, and
  • Redundancy costs

.

In situations like this, I always go back to the double-entry bookkeeping. To generate a profit, any company has to credit the P&L with a sale, and then the debit has to go somewhere on the Balance Sheet - usually into either Debtors or Cash. That's where profit comes from.

So, when a company starts writing down debtor values on its Balance Sheet, this means that it has previously booked profits incorrectly. Therefore in this case, it looks as if the reported profit in 2013 (and maybe earlier) was not real. It's unusual to see debtors within long term assets, as normally debtors are all in current assets. I believe that any debtor item in long term assets is inherently suspect, and this has been confirmed here.

Note how long term debtors rose from £1,367k to £2,124k between Jun to Dec 2013. So that looks as if it provided a false £757k boost to profits in H2 of 2013. That wipes out almost all of the £885k operating profit reported in 2013, thus the company was probably trading at breakeven in 2013.

This type of stuff should make cautious investors run for the hills. If you can't rely on some items in the accounts, then in my view you can't rely on the accounts at all. The final sentence just reinforces my negative view here, clearly indicating the company is now under cashflow pressure;

As previously notified, the Board expects that the Company will report a significant loss before tax for the full year. Against this backdrop, short-term working capital funding and cash generation remains the Board's key priority and further updates will be provided to shareholders as appropriate.

I note it had a £3.0m bank loan reported at the last Bal Sheet date of 30 Jun 2014), so that could be at risk now. If the bank pull the facility, then the only option for survival is a hurried & probably deeply discounted Placing.

If…

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