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For many, the main point of investing in the stock market is to achieve spectacular returns. When you buy and hold the right company, the returns can make a huge difference to both you and your family. For example, the American Rare Earths Limited (ASX:ARR) share price rocketed moonwards 518% in just one year. Also pleasing for shareholders was the 166% gain in the last three months. The company reported its financial results recently; you can catch up on the latest numbers by reading our company report. And shareholders have also done well over the long term, with an increase of 357% in the last three years. We love happy stories like this one. The company should be really proud of that performance!
The past week has proven to be lucrative for American Rare Earths investors, so let's see if fundamentals drove the company's one-year performance.
American Rare Earths recorded just AU$2,291,137 in revenue over the last twelve months, which isn't really enough for us to consider it to have a proven product. So it seems shareholders are too busy dreaming about the progress to come than dwelling on the current (lack of) revenue. It seems likely some shareholders believe that American Rare Earths will find or develop a valuable new mine before too long.
As a general rule, if a company doesn't have much revenue, and it loses money, then it is a high risk investment. There is usually a significant chance that they will need more money for business development, putting them at the mercy of capital markets to raise equity. So the share price itself impacts the value of the shares (as it determines the cost of capital). While some such companies go on to make revenue, profits, and generate value, others get hyped up by hopeful naifs before eventually going bankrupt. Some American Rare Earths investors have already had a taste of the sweet taste stocks like this can leave in the mouth, as they gain popularity and attract speculative capital.
When it last reported its balance sheet in June 2021, American Rare Earths had cash in excess of all liabilities of AU$3.3m. That's not too bad but management may have to think about raising capital or taking on debt, unless the company is close to breaking even. Given the share price has increased by a solid 42% in the last year , it's fair to say investors remain excited about the future, despite the potential need for cash. You can click on the image below to see (in greater detail) how American Rare Earths' cash levels have changed over time.
It can be extremely risky to invest in a company that doesn't even have revenue. There's no way to know its value easily. Given that situation, many of the best investors like to check if insiders have been buying shares. It's often positive if so, assuming the buying is sustained and meaningful. You can click here to see if there are insiders buying.
A Different Perspective
It's good to see that American Rare Earths has rewarded shareholders with a total shareholder return of 518% in the last twelve months. That's better than the annualised return of 26% over half a decade, implying that the company is doing better recently. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. It's always interesting to track share price performance over the longer term. But to understand American Rare Earths better, we need to consider many other factors. Like risks, for instance. Every company has them, and we've spotted 5 warning signs for American Rare Earths (of which 1 is significant!) you should know about.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on AU exchanges.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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