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. Anyone who held Marenica Energy Limited (ASX:MEY) for five years would be nursing their metaphorical wounds since the share price dropped 80% in that time. And it's not just long term holders hurting, because the stock is down 47% in the last year. The falls have accelerated recently, with the share price down 36% in the last three months.
While a drop like that is definitely a body blow, money isn't as important as health and happiness.
With just AU$18,336 worth of revenue in twelve months, we don't think the market considers Marenica Energy to have proven its business plan. You have to wonder why venture capitalists aren't funding it. So it seems shareholders are too busy dreaming about the progress to come than dwelling on the current (lack of) revenue. It seems likely some shareholders believe that Marenica Energy will discover or develop fossil fuel before too long.
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 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). Marenica Energy has already given some investors a taste of the bitter losses that high risk investing can cause.
When it reported in June 2019 Marenica Energy had minimal cash in excess of all liabilities consider its expenditure: just AU$193k to be specific. So if it hasn't remedied the situation already, it will almost certainly have to raise more capital soon. That probably explains why the share price is down 28% per year, over 5 years . You can click on the image below to see (in greater detail) how Marenica Energy's cash levels have changed over time. You can see in the image below, how Marenica Energy'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. Given that situation, would you be concerned if it turned out insiders were relentlessly selling stock? 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 Marenica Energy shareholders are down 47% for the year. Unfortunately, that's worse than the broader market decline of 1.8%. 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. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 28% 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 Marenica Energy better, we need to consider many other factors. Consider for instance, the ever-present spectre of investment risk. We've identified 6 warning signs with Marenica Energy (at least 3 which make us uncomfortable) , and understanding them should be part of your investment process.
But note: Marenica Energy 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.
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