If you love investing in stocks you're bound to buy some losers. But the long term shareholders of Focus Minerals Limited (ASX:FML) have had an unfortunate run in the last three years. Regrettably, they have had to cope with a 63% drop in the share price over that period. The more recent news is of little comfort, with the share price down 38% in a year. More recently, the share price has dropped a further 33% in a month. However, we note the price may have been impacted by the broader market, which is down 23% in the same time period.
With just AU$1,594,000 worth of revenue in twelve months, we don't think the market considers Focus Minerals to have proven its business plan. 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. It seems likely some shareholders believe that Focus Minerals will find or develop a valuable new mine 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. You should be aware that there is always a chance that this sort of company will need to issue more shares to raise money to continue pursuing its business plan. While some such companies go on to make revenue, profits, and generate value, others get hyped up by hopeful naifs before eventually going bankrupt. It certainly is a dangerous place to invest, as Focus Minerals investors might realise.
Our data indicates that Focus Minerals had AU$13m 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. But with the share price diving 28% per year, over 3 years , it's probably fair to say that some shareholders no longer believe the company will succeed. You can see in the image below, how Focus Minerals's cash levels have changed over time (click to see the values). You can see in the image below, how Focus Minerals'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. Would it bother you if insiders were selling the stock? I would feel more nervous about the company if that were so. It only takes a moment for you to check whether we have identified any insider sales recently.
A Different Perspective
While the broader market lost about 7.8% in the twelve months, Focus Minerals shareholders did even worse, losing 38%. 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 11% over the last half decade. We realise that Baron Rothschild 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 business. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 5 warning signs with Focus Minerals (at least 1 which can't be ignored) , and understanding them should be part of your investment process.
But note: Focus Minerals 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 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.
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.