Forecast of 2016 net earningsWe know that we have $24 million in sales ( all numbers in $cad ) contracted in the US.
Its traditional business generates about $3.5 million in the average year.
It will start to grow later this year when new products enter the revenue stream.
But, for now, lets accept $27.5 million as a known and probably minimum sales level for 2016.
Gross margins for the traditional business bounce around 27 %.
I shall use that for 2016 but adjusted for two factors that should boost gross margins in 2016.
First, LRL will benefit from forex gains from its US contracts where it will also use cheaper canadian labor.( labor is about 40 -50 % of total production costs)
An earlier analysis assumed that LRL would underbid by 50 % of this forex gain (1.30 ).
In other words, gross margin will rise to 31 % ( 27 X 1.15 ) in 2016 due to forrx gains.
Secondly, volume produced will increase by a factor of 8 ( $3.5 million to $27.5 million ).
As we all know, volume produced and unit costs are inversely related.
The relationship is best described by a decaying exponential curve.
To avoid technical language, the rule of thumb is that unit costs will decline by 20-30 % for every cumulative doubling of production.
I shall use 20 %.
Assuming a unit cost of 1, doubling of sales to $7 million, unit costs would decline to 0.80.
A further cumulative doubling to $20 million ( $3 m + $7 m X 2 ) will see unit costs decline to 0.64 and a further doubling to $60 million would see unit costs decline to 0.51.
With forecast $27.5 million in 2016 sales, unit costs should decline to about 0.60 relative to 1 at $3.5 million in sales.
This will apply to fixed costs ( leasing, audit, listing, etc ) and to certain other costs where volume can result in better prices and to gains in productioin quality, but not to variable costs.
This allocation cannot be easily determined but a 40 % decrease in unit costs applied to some of the total operating costs should easily boost the GM from 31 % to 35 %.
Which means that gross earnings will be about $9.5 million ( $27.5 X 35 % ).
All other costs in 2015 ( G & A ) amounted to about $950,000.
I assume that, at most, these will increase by 300 % to about $ 3 million.
This means that net earnings before taxes will be about $6.5 million.
LRL have tax loss pools , so net earnings in 2016 will be about $6.5 million.
With a scorching growth rate, LRL should easily be accorded a p/e of 10 times, for a fair market cap of about $65 million.
In other words, a share price signifiantly above $1 per share..