Ann: DroneShield releases DroneSentry-X Mk2, page-46

For a long time, I did not understand where the management of loss-making microcap companies were coming from with the way they present themselves to the market.

Running these companies is incredibly challenging. Most are loss making and trying to fight their way to profitability. To do that they raise capital and must keep raising capital until they are either profitable or they go broke. Most go broke.

Microcaps have a huge challenge with funding. The banks and the bond market won’t lend to them without a huge interest rate premium. For most that means the only way they can access funding is through selling their own shares (IPOs/Capital Raisings).

This means that they must keep their share prices as high as possible for when they need capital. To do this they advertise their shares for sale. Which means that they exaggerate their prospects. They all do this, and as a result it is very rare that management achieves what it says it will do in the timeframe that it claims.

The question for shareholders is not whether companies can be trusted to deliver (they can’t) but to what extent they can be believed. There is only one way to do that because some spin, some outright lie. “We expect/forecast/aim/hope” are the most dangerous phrases in company announcements – it means that management is giving themselves an out.

This means shareholders take on risk, and often much more risk than they recognise. The question is what should shareholders be doing to protect themselves.

There are two main ways:

1. Did the company deliver on what they said they’d deliver on in the past?

2. Has the company performed well in the past?

In the next post I will explain how DRO stacks up.