Double Up and Beat the Dealer?

There are a lot of adages in the world of gambling: only increase your bet when you are winning or playing with house money; double up or double down and beat the dealer; don’t bet over your head; etc. It is hard to know which adage a company is following when, after more than three years of significant losses and even more significant negative cash flows, the company sort of goes for broke.

Argonaut AB of Sweden has had cumulative losses before taxes over the last three and a half years of over SKr465 million, and cumulative negative cash flow after investments and changes in USD exchange rate of SKr2,709 million over the past five and a half years. Its debt to equity ratio has grown from .6 times to 2.7 times since 1990, and its working capital has been barely positive over the last few years. Furthermore, Argonaut’s return on capital or on stockholders’ equity has been negative, or dismal at best – a fairly bleak financial picture for a company which has had operating revenues of over SKr700 million the past couple of years. With this background, Argonaut went for the bomb in October 1994 with a maximum SKr395 million offering to subscribe with preferential rights for Series A and Series B shares.

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