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Investors Who Bought Berkeley Energia (ASX:BKY) Shares Three Years Ago Are Now Down 85%

As every investor would know, not every swing hits the sweet spot. But you want to avoid the really big losses like the plague. So consider, for a moment, the misfortune of Berkeley Energia Limited (ASX:BKY) investors who have held the stock for three years as it declined a whopping 85%. That might cause some serious doubts about the merits of the initial decision to buy the stock, to put it mildly. The more recent news is of little comfort, with the share price down 69% in a year. Shareholders have had an even rougher run lately, with the share price down 40% in the last 90 days. But this could be related to the weak market, which is down 22% in the same period.

We really feel for shareholders in this scenario. It's a good reminder of the importance of diversification, and it's worth keeping in mind there's more to life than money, anyway.

View our latest analysis for Berkeley Energia

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With just AU$2,340,000 worth of revenue in twelve months, we don't think the market considers Berkeley Energia to have proven its business plan. This state of affairs suggests that venture capitalists won't provide funds on attractive terms. So it seems that the investors focused more on what could be, than paying attention to the current revenues (or lack thereof). For example, they may be hoping that Berkeley Energia finds fossil fuels with an exploration program, before it runs out of money.

Companies that lack both meaningful revenue and profits are usually considered 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). Some Berkeley Energia investors have already had a taste of the bitterness stocks like this can leave in the mouth.

Berkeley Energia has plenty of cash in the bank, with cash in excess of all liabilities sitting at AU$50m, when it last reported (December 2019). This gives management the flexibility to drive business growth, without worrying too much about cash reserves. But with the share price diving 47% per year, over 3 years , it could be that the price was previously too hyped up. The image below shows how Berkeley Energia'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 Berkeley Energia's balance sheet has changed over time; if you want to see the precise values, simply click on the image.

ASX:BKY Historical Debt, March 13th 2020
ASX:BKY Historical Debt, March 13th 2020

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. What if insiders are ditching the stock hand over fist? It would bother me, that's for sure. It only takes a moment for you to check whether we have identified any insider sales recently.

A Different Perspective

We regret to report that Berkeley Energia shareholders are down 69% for the year. Unfortunately, that's worse than the broader market decline of 12%. However, it could simply be that the share price has been impacted by broader market jitters. It might be worth keeping an eye on the fundamentals, in case there's a good opportunity. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 8.6% per year over five years. 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. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Case in point: We've spotted 5 warning signs for Berkeley Energia you should be aware of.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

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.