Mining services company WDS Limited (ASX: WDS) saw its share price sank 35% to below 10 cents a share today, after massively downgrading its expected loss for the 2015 financial year.
In June 2015, WDS said it expected to report a loss of between $14 and $15 million for the full year, but now expects to report a loss of close to double that of between $27 and $28 million.
The reason provided by the company may sound complicated but bear with me.
"The major contributor to this adjustment is the reforecast of the Eagle Downs Coal Mine's (EDCM) project position at completion. Previous guidance from WDS had forecast that the EDCM project would achieve a 'profit neutral' position at completion in FY16. However, the reforecast just completed, has resulted in a forecast loss at completion, which has now been incorporated into the company's results for FY15."
Essentially, WDS has been unable to increase productivity on the EDCM project and will now make a loss on the contract when it finishes in the 2016 financial year.
I've mentioned this several times but winning contracts, no matter how large they might appear to be, bear very little relation to a company's financial results at the end of the year. Companies could announce multiple contract wins to the ASX, but unless they are completed profitably, the announcement, in and of itself, means very little.
Making matters worse for WDS in this case, is that due to the change in forecast, the company is in breach of its debt covenant ratios and has had to inform its bankers.
Oh dear.
No wonder shares fell so much today. WDS is on the brink of going bust and management will have to do some heavy work to pull the company back from the edge.
