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When you buy shares in a company, there is always a risk that the price drops to zero. But if you pick the right business to buy shares in, you can make more than you can lose. For example, the Connexion Telematics Ltd (ASX:CXZ) share price has soared 225% return in just a single year. On the other hand, the stock price has retraced 7.1% in the last week. But note that the broader market is down 0.06% since last week, and this may have impacted Connexion Telematics's share price. Unfortunately the longer term returns are not so good, with the stock falling 91% in the last three years.
We don't think Connexion Telematics's revenue of AU$651,340 is enough to establish significant demand. As a result, we think it's unlikely shareholders are paying much attention to current revenue, but rather speculating on growth in the years to come. Investors will be hoping that Connexion Telematics can make progress and gain better traction for the business, before it runs low on cash.
We think companies that have neither significant revenues nor profits are pretty high risk. There is usually a significant chance that they will need more money for business development, putting them at the mercy of capital markets. 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 Connexion Telematics 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.
Our data indicates that Connexion Telematics had AU$485,091 more in total liabilities than it had cash, when it last reported in December 2018. That puts it in the highest risk category, according to our analysis. So we're surprised to see the stock up 225% in the last year, but we're happy for holders. Investors must really like its potential. You can click on the image below to see (in greater detail) how Connexion Telematics's cash levels have changed over time.
In reality it's hard to have much certainty when valuing a business that has neither revenue or profit. One thing you can do is check if company insiders are buying shares. It's usually a positive if they have, as it may indicate they see value in the stock. You can click here to see if there are insiders buying.
A Different Perspective
Pleasingly, Connexion Telematics's total shareholder return last year was 225%. What is absolutely clear is that is far preferable to the dismal 55% average annual loss suffered over the last three years. It could well be that the business has turned around -- or else regained the confidence of investors. You might want to assess this data-rich visualization of its earnings, revenue and cash flow.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on AU exchanges.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.