Today's Falling Knife: Cape Crashes 29%

The shares of Cape  (LSE: CIU.L  ) crashed 75 pence, or 29%, to 187 pence today after the FTSE 250 company owned up to problems within its Australian operation.

The engineering services contractor admitted group margins had been hindered by a "substantial deterioration" at the subsidiary, and blamed the difficulties on a mix of weak trading and a number of "legacy issues" involving inaccurate balance-sheet accounting.

Cape also said the bookkeeping problems in Australia had prompted a group-wide review of balance-sheet accounting and the departure of the firm's finance director.

The contractor now reckons profits for the full year will be "significantly below previous expectations." The firm acknowledged, too, that there "remains uncertainty in the eventual outcome of the full year performance" because of the balance-sheet investigations.

Even so, Cape was confident to say its net debt at year's end would be between £80 million and £90 million.

Today's statement does underline the old adage that "profit warnings come in threes."

Back in August, Cape said challenging trading conditions in the Far East would hamper the group's overall near-term performance. The shares slumped 37% on the day.

And before that, in May, Cape's shares plunged 27% after the firm warned of problems with a contract in Algeria that would cost the mid-cap £14 million.

With Cape's shares down a thumping 69% since their 2011 peak, clearly the business has its problems. Certainly, in today's knife-edge market, smaller companies can be punished severely if they hit trouble.

But Cape does have a history of collapsing share prices and super-strong recoveries.

During 2008 for instance, the shares plunged from above 300 pence to as low as 18 pence -- but have since generated a tenfold return despite the aforementioned profit warnings.

Then between 2000 and 2002, the shares crashed 90% to as low as six pence, but went on to expand fiftyfold within five years.

Such life-changing returns suggest it may pay to keep an eye on Cape for another recovery.

In fact, if you are keen to earn handsome returns from higher-risk shares, this free Motley Fool report could help you on your way.

The report explains how taking a contrarian view and backing unloved companies can be vital steps on the path to the magic £1,000,000 milestone. Maybe one day, a recovering Cape could be the share that transforms your wealth.

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Maynard Paton does not own any share mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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