Could these red flags weigh on the Gfinity (LON:GFIN) share price?

Could these red flags weigh on the Gfinity (LON:GFIN) share price?

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Uncertainty about a company's earnings or the way it reports its figures will inevitably put pressure on share prices. What most investors don’t realise is that there are algorithmic ways to check the credibility of company earnings - and one of them is called the Beneish M-Score

What this M-Score flags up about Gfinity (LON:GFIN) might be causing Finance Director Jonathan Hall the odd sleepless night...

About Gfinity (LON:GFIN)

Stockopedia's algorithms classify Gfinity as a Speculative, Micro-Cap with a low StockRank of 2/100 - likely in part down to the company's consistently steep losses, its history of equity raises, and its poor share price performance.

The Gfinity share price collapse has led to a 1-year relative strength against the FTSE All-Share index of -71.1%. The group recently made some positive noises in its half-year results, with H1 19 revenues of £4.4m already more than FY18 revenues of £4.3m. A management reshuffle, with some key, senior hires, appears to have driven a step up in revenue.

While those figures sound promising, the group thinks it will only approach breakeven by 2021 and its Beneish M-Score - which I’'ll explain shortly - shows that there are areas in Gfinity's accounts that might be worth closer investigation.

How the Beneish M-Score works

In 1999, a finance professor called Messod Daniel Beneish published a landmark research paper entitled The Detection of Earnings Manipulation. It showed how you can use accounting data to spot problems early.

Since then it’s become an indispensable checklist for professional money managers and investment banks - and that's why Stockopedia runs this test on every day on every stock on the stock market.

Unfortunately, Gfinity performs particularly poorly here with its M-Score of 6.52 well above the -1.78 level that indicates a potential risk. Here is a graphic that shows a breakdown of Gfinity's M-Score:

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It's important to note that this doesn’t mean that Gfinity is doing anything wrong. But it does point to areas worth investigating in more detail. As an investor, you should know what these red flags mean - both in Gfinity and any other stock you might be thinking of buying.


Next Steps

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Gfinity's StockRank™

NeutralHighly Speculative

Gfinity's StockRank™

With a StockRank of 19, Gfinity is in the bottom 19% of the 7,586 stocks we cover in Europe, according to our proprietary ranking system.

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