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Did Changing Sentiment Drive Eastern Iron's (ASX:EFE) Share Price Down A Worrying 67%?

Simply Wall St
·4-min read

Eastern Iron Limited (ASX:EFE) shareholders will doubtless be very grateful to see the share price up 33% in the last quarter. But over the last three years we've seen a quite serious decline. Tragically, the share price declined 67% in that time. Some might say the recent bounce is to be expected after such a bad drop. While many would remain nervous, there could be further gains if the business can put its best foot forward.

View our latest analysis for Eastern Iron

We don't think Eastern Iron's revenue of AU$11,528 is enough to establish significant demand. You have to wonder why venture capitalists aren't funding it. 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. It seems likely some shareholders believe that Eastern Iron will find or develop a valuable new mine before too long.

We think companies that have neither significant revenues nor profits are pretty high risk. You should be aware that there is always a chance that this sort of company will need to issue more shares to raise money to continue pursuing its business plan. While some such companies do very well over the long term, others become hyped up by promoters before eventually falling back down to earth, and going bankrupt (or being recapitalized). Some Eastern Iron investors have already had a taste of the bitterness stocks like this can leave in the mouth.

Eastern Iron had cash in excess of all liabilities of just AU$404k when it last reported (June 2019). So if it hasn't remedied the situation already, it will almost certainly have to raise more capital soon. With that in mind, you can understand why the share price dropped 31% per year, over 3 years . The image below shows how Eastern Iron's balance sheet has changed over time; if you want to see the precise values, simply click on the image. The image below shows how Eastern Iron's balance sheet has changed over time; if you want to see the precise values, simply click on the image.

ASX:EFE Historical Debt, January 29th 2020
ASX:EFE Historical Debt, January 29th 2020

Of course, the truth is that it is hard to value companies without much revenue or profit. Given that situation, would you be concerned if it turned out insiders were relentlessly selling stock? I'd like that just about as much as I like to drink milk and fruit juice mixed together. You can click here to see if there are insiders selling.

A Different Perspective

Investors in Eastern Iron had a tough year, with a total loss of 20%, against a market gain of about 24%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 18% over the last half decade. Generally speaking long term share price weakness can be a bad sign, though contrarian investors might want to research the stock in hope of a turnaround. It's always interesting to track share price performance over the longer term. But to understand Eastern Iron better, we need to consider many other factors. To that end, you should learn about the 6 warning signs we've spotted with Eastern Iron (including 4 which is shouldn't be ignored) .

Of course Eastern Iron may not be the best stock to buy. So you may wish to see this free collection of growth stocks.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on AU exchanges.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.

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. Thank you for reading.