We're definitely into long term investing, but some companies are simply bad investments over any time frame. We don't wish catastrophic capital loss on anyone. Spare a thought for those who held MEC Resources Limited (ASX:MMR) for five whole years - as the share price tanked 89%. We also note that the stock has performed poorly over the last year, with the share price down 67%. Shareholders have had an even rougher run lately, with the share price down 33% in the last 90 days.
We really hope anyone holding through that price crash has a diversified portfolio. Even when you lose money, you don't have to lose the lesson.
MEC Resources recorded just AU$107,131 in revenue over the last twelve months, which isn't really enough for us to consider it to have a proven product. This state of affairs suggests that venture capitalists won't provide funds on attractive terms. 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. For example, they may be hoping that MEC Resources finds fossil fuels with an exploration program, before it runs out of money.
We think companies that have neither significant revenues nor profits are pretty high risk. There is almost always a chance they will need to raise more capital, and their progress - and share price - will dictate how dilutive that is to current holders. 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). MEC Resources has already given some investors a taste of the bitter losses that high risk investing can cause.
MEC Resources had liabilities exceeding cash by AU$1.6m when it last reported in June 2019, according to our data. That makes it extremely high risk, in our view. But with the share price diving 35% per year, over 5 years , it's probably fair to say that some shareholders no longer believe the company will succeed. The image below shows how MEC Resources's balance sheet has changed over time; if you want to see the precise values, simply click on the image. You can click on the image below to see (in greater detail) how MEC Resources'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. Would it bother you if insiders were selling the stock? It would bother me, that's for sure. You can click here to see if there are insiders selling.
What about the Total Shareholder Return (TSR)?
We've already covered MEC Resources's share price action, but we should also mention its total shareholder return (TSR). The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. We note that MEC Resources's TSR, at -85% is higher than its share price return of -89%. When you consider it hasn't been paying a dividend, this data suggests shareholders have benefitted from a spin-off, or had the opportunity to acquire attractively priced shares in a discounted capital raising.
A Different Perspective
Investors in MEC Resources had a tough year, with a total loss of 59%, against a market gain of about 22%. 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 32% 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. You might want to assess this data-rich visualization of its earnings, revenue and cash flow.
But note: MEC Resources may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).
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 email@example.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.