Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
China Ming Yang Wind Power Group (UNKNOWN:MY.DL) clipped investors' hopes last week when its shares tanked 22%, as the company swung to losses in its third quarter. While one weak quarter may not say much about the company, the wind turbine maker's report revealed several yellow flags that should make investors cautious.
China Ming Yang reported a third-quarter loss of $11.7 million against a profit of $0.8 million a year ago, despite a 22% jump in revenue. It's clear that the company is having a tough time converting its incremental revenue into profits, which doesn't bode well for investors. China Ming Yang's costs shot up during the quarter, and it's critical to see what those cost components were.
As a company, China Ming Yang is pretty much in an investment phase right now. But had higher spending on research and development been the only contributing factor to the company's rising costs, investors could have remained optimistic. Unfortunately, its research and development expenses climbed only 19% year over year during the third quarter. Instead, a staggering 85% jump in transportation and selling charges, and another 40% increase in administrative expenses, were the major factors that drove China Ming Yang's profits down.
If the company doesn't tighten its grip on these operational expenses soon, profits will be hard to come by, and higher revenue will not matter. China Ming Yang's third-quarter gross margin also dipped four percentage points to 13.2% during the quarter, indicating management's weak control over costs.
A lost cause?
When China Ming Yang will break even and turn profitable is anyone's guess, but the biggest concern is that management, too, seems clueless. During the earnings call, when an analyst wanted to know when the company expects to turn profitable, CFO Calvin Lau replied, "as a company policy, we don't actually give financial forecasts." That sounds ridiculous for an answer to a question that determines whether the company is even worth investing in.
Management highlighted the growth opportunities that the company has, but lack of vision may prevent it from tapping its full potential. As a company that deals in a renewable energy product, China Ming Yang has a huge opportunity to address the alarming pollution levels in the nation. The company also recently tied up with one of India's leading companies, Reliance Capital, to sell its wind turbine. That opens the doors to another high-potential market.
But as I said, all those opportunities may go waste if management doesn't start taking things seriously. Controlling costs and maintaining, if not expanding, margins are the first critical steps that China Ming Yang needs to take care of. Until I see the first signs of hope, I'll keep my hands off the volatile shares.
Fool contributor Neha Chamaria and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.