Woodbois shares are cheap. Should I buy them?

Risk reward ratio / risk management concept

Woodbois (LSE: WBI) shares have experienced a significant decline recently. Less than six months ago, they were trading near 8p. Today however, they can be picked up for less than 3p.

Is this a good opportunity to buy some shares in the AIM-listed wood and carbon services company for my portfolio? Or is Woodbois stock a risky proposition from here? Let’s take a look.

Is now the time to buy the shares?

Woodbois released a trading update for the third quarter of 2022 last month, and there were definitely some positive takeaways from it.

For the period, the group generated record quarterly revenue of $5.8m, up 29% year on year. This took revenues for the first nine months of the year to a record $17.1m, up 35%. Meanwhile, gross profit margin for the first nine months of the year improved to 24% from 23% in the first half of 2022.

Looking ahead, management was optimistic about the future. “Almost regardless of market conditions we look forward with confidence to further growth in 2023 and beyond,” said CEO Paul Dolan. This kind of confidence from management is encouraging.

Where are the profits?

However, there were also a few issues of concern in the update.

For a start, there was no mention of operating profit, which suggests that the company generated a loss during the quarter. This could explain why the share price fell after the update was posted. In the current economic environment, where there’s a lot of uncertainty, investors want to see profits.

Secondly, the company’s cash balance at the end of September was only $1.4m. That’s low. Cash is the lifeblood of any business. Without it, firms tend to experience operational challenges. Given this small cash balance, Woodbois may need to raise capital. If it did this via an equity raise, its share price would probably fall.

Finally, debt at the end of the quarter was $12.3m. That’s quite high given that Woodbois isn’t generating consistent profits. Especially now that interest rates are rising and debt is becoming more expensive to pay off.

Overall, the update highlighted a number of key risks for me to consider.

This stock could be volatile

Looking beyond the latest trading update, there are some other risks that concern me here.

One is that Woodbois is a very small — micro-cap — company. Currently, its market capitalisation is around £60m. The share prices of companies this size tend to be very volatile. Meanwhile, there can be quite a large trading spread with micro-cap stocks, which increases buying and selling costs.

Another issue is that ex-Chairman Miles Pelham currently owns around 20% of the company’s shares. If he decided to offload the stock, it would most likely put downward pressure on the share price.

My move now

Given the risks here, I’m happy to leave Woodbois shares on my watchlist for now. In my view, there are other growth stocks that offer a better risk/reward proposition at the moment.

The post Woodbois shares are cheap. Should I buy them? appeared first on The Motley Fool UK.

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Edward Sheldon has no position in any of the shares 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.