Good morning. Quiet for news today. Office2office (LON:OFF) has put out a profit warning. Their shares have fallen from about 100p to 28.5p in the last year, and I would imagine are likely to take another tumble today. In their year end trading update issued today, the company says that underlying profit for 2013 will be around £4.2m. Borrowings are reported as down from £29m a year ago to £23m at 31 Dec 2013, but that's actually a negligible change from the last interim report at 30 Jun 2013.

Unusually for this early in the year, they warn on profits for 2014, saying that;

 

...trading conditions in this market will remain at least equally challenging this year, with continuing pressure on margins.

 

The problem here is the Balance Sheet. It's terrible. Once you write off the £57.4m intagibles, net assets are negative £40m. Given the poor outlook I'd be surprised if shareholders are willing to stump up the level of fresh equity that would be needed to fix the Balance Sheet, but you never know, we're in a bull market and surprising things can happen. Also, further cost cutting is underway, as you would expect.

As regards risk/reward though, my view is that it's pretty awful here. There's a high risk of the company going bust, due to its high debt, and extremely weak Balance Sheet. Yet there seems little upside, due to the poor trading outlook. So these shares are very much a bargepole situation. So the ultra-low PER of 2.55 shown on Stockopedia is a value trap in my opinion. It depends on whether the Bank are prepared to give the company time to trade out of this situation, if that is possible? It's difficult to see how that will happen, as any cashflow they generate will probably be used in paying bank interest, and in exceptional costs, as evidence by the negligible reduction in bank debt in the last six months.

Therefore in my view these shares are probably worth nothing, but good luck to them. House broker WH Ireland very surprisingly have issued an "outperform" rating on the shares this morning - how on earth does that make sense going in conjunction with them downgrading their forecast earnings for 2014 by 31.4%?! Although they do acknowledge that "the risk profile remains…

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