Taking the occasional loss comes part and parcel with investing on the stock market. And unfortunately for Carpentaria Resources Limited (ASX:CAP) shareholders, the stock is a lot lower today than it was a year ago. To wit the share price is down 52% in that time. At least the damage isn't so bad if you look at the last three years, since the stock is down 21% in that time. Even worse, it's down 14% in about a month, which isn't fun at all.
With just AU$3,618 worth of revenue in twelve months, we don't think the market considers Carpentaria Resources to have proven its business plan. This state of affairs suggests that venture capitalists won't provide funds on attractive terms. So it seems shareholders are too busy dreaming about the progress to come than dwelling on the current (lack of) revenue. For example, investors may be hoping that Carpentaria Resources finds some valuable resources, before it runs out of money.
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. So the share price itself impacts the value of the shares (as it determines the cost of capital). 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). Carpentaria Resources has already given some investors a taste of the bitter losses that high risk investing can cause.
When it last reported its balance sheet in June 2019, Carpentaria Resources had cash in excess of all liabilities of AU$2.6m. While that's nothing to panic about, there is some possibility the company will raise more capital, especially if profits are not imminent. We'd venture that shareholders are concerned about the need for more capital, because the share price has dropped 52% in the last year . The image below shows how Carpentaria Resources's balance sheet has changed over time; if you want to see the precise values, simply click on the image. You can see in the image below, how Carpentaria Resources's cash levels have changed over time (click to see the values).
In reality it's hard to have much certainty when valuing a business that has neither revenue or profit. What if insiders are ditching the stock hand over fist? I would feel more nervous about the company if that were so. You can click here to see if there are insiders selling.
A Different Perspective
Investors in Carpentaria Resources had a tough year, with a total loss of 52%, against a market gain of about 19%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 9.2% over the last half decade. We realise that Buffett has said investors should 'buy when there is blood on the streets', but we caution that investors should first be sure they are buying a high quality businesses. 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.