The most you can lose on any stock (assuming you don't use leverage) is 100% of your money. But when you pick a company that is really flourishing, you can make more than 100%. For example, the Po Valley Energy Limited (ASX:PVE) share price has soared 140% in the last three years. Most would be happy with that. Also pleasing for shareholders was the 20% gain in the last three months.
With just €1,135 worth of revenue in twelve months, we don't think the market considers Po Valley Energy to have proven its business plan. 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 Po Valley Energy finds fossil fuels with an exploration program, 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). Po Valley Energy has already given some investors a taste of the sweet gains that high risk investing can generate, if your timing is right.
Our data indicates that Po Valley Energy had €4.0m more in total liabilities than it had cash, when it last reported in June 2019. That puts it in the highest risk category, according to our analysis. So the fact that the stock is up 87% per year, over 3 years shows that high risks can lead to high rewards, sometimes. Investors must really like its potential. You can see in the image below, how Po Valley Energy's cash levels have changed over time (click to see the values). The image below shows how Po Valley Energy's balance sheet has changed over time; if you want to see the precise values, simply click on the image.
In reality it's hard to have much certainty when valuing a business that has neither revenue or profit. However you can take a look at whether insiders have been buying up shares. If they are buying a significant amount of shares, that's certainly a good thing. You can click here to see if there are insiders buying.
What about the Total Shareholder Return (TSR)?
We've already covered Po Valley Energy's share price action, but we should also mention its total shareholder return (TSR). The TSR attempts to capture the value of dividends (as if they were reinvested) as well as any spin-offs or discounted capital raisings offered to shareholders. We note that Po Valley Energy's TSR, at 232% is higher than its share price return of 140%. 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
It's nice to see that Po Valley Energy shareholders have received a total shareholder return of 58% over the last year. That gain is better than the annual TSR over five years, which is 23%. Therefore it seems like sentiment around the company has been positive lately. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Be aware that Po Valley Energy is showing 5 warning signs in our investment analysis , and 3 of those can't be ignored...
Po Valley Energy is not the only stock that insiders are buying. 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 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.
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